Executing Liens To Secure Funding

April 13, 2006

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When executing funding strategies for an operating/holding company business structure, small business owners often strategically combine debt and equity funding to maximize asset protection planning. To secure the debt funding, the owner (now acting as a creditor to the operating company) can use liens.

Encumbering the operating entity's assets with liens that run in favor of the holding entity or owner is one way to protect the operating entity's business assets. These liens must be perfected in order for them to be valid. This requirement includes mortgages on real property, which must be recorded to protect the owner's priority claim. Liens against personal property (i.e., property used inside or outside of a business other than real property) are perfected differently.

The Uniform Commercial Code Form 1 (UCC1) can be used to perfect a lien when acquiring assets, as well as on existing or future assets.

In addition, there is a less complicated alternative to using a holding entity and an operating entity to protect the operating entity's assets: the one-entity approach. Leases, liens and loans are still used, but the business owner personally acts as the holding entity. This method is simpler than using holding and operating entities, but is not always as effective.