Continuous Withdrawal of Assets

April 13, 2006

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Clearly, a funding strategy that uses an operating/holding company structure and that also minimizes the amount of vulnerable assets invested in a business will not work unless a plan exists to withdraw, on a regular basis, the assets generated by the operating entity.

Otherwise, vulnerable assets will stay within the operating entity, and the owner's liability, while limited, will still be significant, as these assets remain unprotected.

A number of withdrawal strategies exist to accomplish this objective, including salary, lease/loan payments, and sale of accounts receivable to the owner or the holding entity.

Work Smart

Creditors can attack the initial capitalization of an entity as fraudulent under a doctrine termed "piercing of the veil" of limited liability.

Creditors also can attack withdrawals, as well as the creation of liens, as fraudulent conveyances (see our discussion, "Avoiding Challenges to Asset Transfers"). Be especially cognizant of the entity's financial position (assets minus liabilities) when creating liens because insolvency can be a basis for creditors to attack these transfers. A good practice is to leave a portion of the assets contributed for the equity interest unencumbered. This practice is insurance that the entity will not be insolvent, from a balance sheet analysis, when liens and other transfers take place.