The Friendly Lien: A Creative Asset Protection Strategy with LLCs
At Fox & Moghul, we get frequent calls from real estate investors looking for the “best” asset protection strategy.
Well, here is one for the creative types.
The Friendly Lien, a clever and innovative approach to asset protection, takes advantage of the legal structure and versatility of Limited Liability Companies (LLCs). This strategy employs the use of two separate LLCs: a holding LLC, which serves as a financing entity, and an operating LLC, which conducts the day-to-day business activities and holds the assets. By creating a loan arrangement between these two LLCs and securing it with a lien, the assets held by the operating LLC are made less appealing to potential creditors.
The Mechanics of the Friendly Lien
The Friendly Lien strategy begins with the establishment of two separate LLCs. The first, a holding LLC, is created to serve as a financing entity. This LLC will provide a loan to the second, an operating LLC, which will hold the assets and conduct the daily business operations.
Once the two LLCs are set up, the holding LLC issues a loan to the operating LLC, secured by the assets of the operating LLC. To perfect the security interest held by the holding LLC, a UCC-1 financing statement is filed. This lien, often referred to as a “friendly lien,” serves to create an extra layer of protection for the assets held by the operating LLC.
The Benefits of the Friendly Lien
The primary advantage of the Friendly Lien strategy is that it discourages outside creditors from attempting to seize the assets held by the operating LLC. In the event of a legal claim against the operating LLC, a creditor would be required to satisfy the pre-existing lien held by the holding LLC before they could collect on the assets. As the holding LLC is a separate legal entity, this can present a significant obstacle for creditors.
The Friendly Lien also offers the potential for increased financial flexibility for the business owner. By having a separate holding LLC act as the financing entity, the business owner may be able to access capital more easily or at more favorable terms than would be possible through traditional lenders.
Moreover, this strategy can provide a degree of privacy to the business owner. As the UCC-1 financing statement is a public document, the existence of the lien may deter other creditors from attempting to pursue the operating LLC’s assets, thereby reducing the likelihood of litigation or collection actions.
Key Considerations and Potential Pitfalls
While the Friendly Lien strategy can be an effective asset protection tool, it is essential to ensure that the arrangement is structured and implemented correctly. To avoid potential pitfalls, business owners should consult with an experienced attorney to navigate the complexities of the lien process and ensure compliance with all applicable laws and regulations.
It is crucial to ensure that the loan arrangement between the holding LLC and the operating LLC is properly documented and executed, reflecting a genuine and enforceable debt obligation. A poorly structured or sham loan could be challenged by creditors, potentially undermining the effectiveness of the Friendly Lien.
Additionally, business owners should be mindful of fraudulent conveyance laws, which are designed to prevent the transfer of assets with the intent to hinder, delay, or defraud creditors. To avoid running afoul of these laws, the Friendly Lien should be established before any legal claims or financial difficulties arise.
The Friendly Lien is a creative and powerful asset protection strategy that leverages the flexibility and legal structure of LLCs to shield assets from potential creditors. By establishing a genuine loan arrangement between a holding LLC and an operating LLC, business owners can create an additional layer of protection for their assets while maintaining control and financial flexibility. As with any complex legal strategy, it is essential to consult with an experienced attorney to ensure that the Friendly Lien is implemented correctly and in compliance with all applicable laws. For more information on asset protection, consult our Free E-Books Here.
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