Have you stopped as a lender to think about whether your borrowers are creating their businesses precisely as required by law? If not, take advantage of the chance to do so, and you can ensure the borrower entity has the right people signing on its behalf at the closing. Alternately, if you skip doing your due assessment when creating borrower entities, the legitimacy of the entire transaction might just be questioned. Let us look at how to avoid these situations.
- Be cautious of the Intricacies of Agency Law: If you are like most people, you probably have not heard of the legal idea of “Agency,” or maybe you have, but only briefly. Agency focuses on whether the persons signing the contract are authorized individuals to act on behalf of another, including a business entity. This might invalidate the transaction if the agency rules are not followed.
- The Limited Agency of Business Entities: Business entities are capable of acting, but they need someone to carry those acts out on their behalf. To operate on behalf of the entity, that person must be lawfully appointed as an authorized AGENT. For these reasons, the mere fact that someone owns a corporate company does not automatically provide the right to act. This reasoning applies to non-owners like workers, officers, directors, or partners.
- Identify the potential risks: Take your time when setting up the borrower entity; do not rush it. Recognize and comprehend the risk that comes with the process, then be ready and take appropriate action. The default laws of the state of formation will take effect if charter documents or other formalities are not established. The loan is eventually at risk if the flaws are not fixed and the wrong individual signs on behalf of the organization.
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