Lending to your own LLC: what a lien protects, and what it doesn't
Most owners fund their company by moving money in and never writing anything down. A smaller group does it deliberately: the owner, or the owner's holding company, lends the money and records a lien against what the company buys with it. Done right, that lien can put you first in line ahead of anyone who later sues the company. Done wrong, it's a piece of paper a court ignores.
How it works. Your holding company lends your property LLC the purchase money. The property LLC signs a promissory note and grants a deed of trust or mortgage on the property, recorded in the county where it sits. For equipment or other personal property, the security interest is perfected with a UCC filing instead. If a tenant or a customer later wins a judgment against the property LLC, your recorded lien comes ahead of theirs. The equity a creditor hoped to reach is already pledged to you. Some owners also like that the public record shows a lender of record rather than a person's name, which pairs with what an anonymous LLC actually hides.
What makes it real. Courts look past labels. A loan holds up when it looks like one an outside lender would make:
A signed note with a stated principal, interest rate, and repayment schedule. Money that actually moved, traced from the lender's account to the borrower's. Payments made on schedule, and interest reported as income by the lender. A lien recorded when the loan was made, not after trouble appeared. And written consent from each company, signed by someone with authority to sign, as Is the money you put into your business a contribution or a loan? explains.
Where it fails. An insider loan gets more scrutiny than a bank loan, not less.
A lien recorded after the claim arises. Recording a lien once you see a lawsuit coming invites a fraudulent transfer claim, and transfers to insiders shortly before a bankruptcy can be clawed back as preferences. The protection comes from doing it at the start.
A loan nobody treats as a loan. No payments, no interest, no enforcement when the borrower falls behind. A court can recharacterize it as an equity contribution, and equity stands behind every creditor.
Equitable subordination. Even a real insider loan can be pushed behind outside creditors if the insider used control of the company unfairly.
The lender's own exposure. The lien protects the property from the borrower's creditors. It does nothing about the lender's. If your holding company is the lender, a creditor of the holding company can reach the note and the lien. That's why the holding company should stay quiet and own little else. What a holding company does, and what it doesn't covers that side.
An existing mortgage. A second lien may breach the covenants in a first mortgage, and a transfer to an LLC can trigger a due-on-sale clause. Check your loan documents first. Can you move a mortgaged property into your LLC?
The tax side. Interest paid between related parties is income to the lender. Below-market rates can trigger imputed interest, so use at least the applicable federal rate for the month the loan is made. Your accountant should know the loan exists before the first payment, not at year-end.
The paperwork. A member-loan set usually means a promissory note, a security instrument (deed of trust, mortgage, or security agreement), the recording or UCC filing, and a written consent from each company approving the loan. Recording happens in the state where the property sits, usually through a closing attorney or title company there.
A lien is a real protection tool with real limits. It works when it's set up at the beginning and run like a loan for its whole life.
Book a consultation if you're weighing this structure.
This is general information, not legal advice for your situation. If you want an answer for your situation, book a consultation.
