How Can a Lien Be Placed on an LLC?
An LLC's liability shield is strong but not absolute. Learn when and how creditors can legally place a claim against a limited liability company's assets.
A Limited Liability Company, or LLC, is a business structure that is legally separate from its owners, who are called members. This separation creates a liability shield that protects the personal assets of the members from the business’s debts and obligations. A lien is a legal claim or right against an asset, used as security to ensure a debt is satisfied. When a creditor holds a lien, it gives them a legal interest in the property, which can be used to collect what they are owed.
Liens Arising from LLC Business Activities
The most direct way for a lien to be placed on an LLC is when the company itself incurs a debt from its operations. If the business fails to meet these financial responsibilities, creditors can take legal steps to secure their interest in the company’s property, including its cash, equipment, and real estate.
A common type of lien is a consensual one, which the LLC voluntarily agrees to, often when seeking financing. To secure a loan, a lender will require the LLC to pledge assets as collateral, such as inventory, accounts receivable, or equipment. The lender perfects this security interest by filing a UCC-1 financing statement with the Secretary of State, which informs other creditors of the lender’s priority claim.
Statutory liens are created by law without the LLC’s consent. A prominent example is a tax lien, which the IRS or a state tax authority can place on all company assets for unpaid business taxes. The process begins with a “Notice and Demand for Payment,” and if the debt remains unpaid, the agency files a “Notice of Federal Tax Lien” in public records. Another type is a mechanic’s lien, filed by unpaid contractors or suppliers who provided labor or materials to improve the LLC’s real property.
A judgment lien is the result of litigation. If an LLC loses a lawsuit and does not pay the amount ordered by the court, the winning party can convert the court’s decision into a lien. This involves filing the judgment with the appropriate county or state office, which attaches the lien to the LLC’s assets in that jurisdiction.
Liens Arising from an Owner’s Personal Debts
If an LLC member incurs personal debt, such as from a personal credit card or a car loan, creditors cannot directly seize the LLC’s assets to satisfy that owner’s individual obligation. The company’s property, including its bank accounts and equipment, is shielded from the personal financial troubles of its members. This protection is a primary reason why entrepreneurs choose the LLC structure.
When a creditor obtains a personal judgment against an LLC member, their recourse is not against the LLC’s assets but against the member’s ownership stake. The legal tool for this is a charging order, which a court grants to the creditor. This order attaches to the member’s “distributional interest,” giving the creditor the right to receive any profit distributions made to that specific member.
A charging order has significant limitations for the creditor. It does not grant the creditor management rights or voting power, nor can they force the LLC to make a distribution or sell company assets. If the LLC decides not to issue distributions, the creditor receives nothing while the order is in effect.
This mechanism protects the other members and the business from disruption, as the creditor is only a passive recipient of potential profit distributions. This distinction between a lien on distributions and a lien on company assets is a core element of LLC asset protection.
Piercing the Corporate Veil
The liability shield of an LLC is strong but not absolute. In certain situations, a court can “pierce the corporate veil,” disregarding the LLC’s separate legal status and holding the owners personally responsible for the company’s debts.
A court may take this step if it finds the LLC is an “alter ego” of the owner. This often happens with a significant commingling of assets, such as an owner using the LLC’s bank account for personal expenses or using company property for personal benefit without proper accounting.
Failing to observe corporate formalities is another factor courts consider. While LLCs are flexible, they are still expected to maintain separation by keeping distinct financial records, holding member meetings as outlined in the operating agreement, and documenting major business decisions.
Fraud or illegal acts committed through the LLC can also lead a court to pierce the veil. The consequence is that a creditor with a judgment against the LLC can pursue the members’ personal assets. Conversely, a member’s personal creditor could be allowed to place a lien directly on the LLC’s assets, bypassing the protection of a charging order.
Identifying Liens on an LLC
Information about liens on an LLC is publicly available, and discovering them is a standard part of due diligence before a major transaction. An existing lien can encumber assets and complicate the sale of the business or its property.
The first place to check for Uniform Commercial Code (UCC) liens is the office of the Secretary of State where the LLC is registered. These are filed by lenders who secured a loan with the LLC’s personal property, like inventory or equipment. Most Secretary of State websites have an online search portal to view any filed UCC-1 financing statements.
For liens related to real estate, the search must be conducted at the county recorder’s or clerk’s office where the property is located. This is where documents like mechanic’s liens, judgment liens, and property tax liens are recorded. A title search on a property owned by the LLC will reveal these encumbrances.
Finally, searching court records in the jurisdictions where the LLC operates can uncover pending lawsuits or judgments against the company. Finding a recent judgment against the LLC is a strong indicator that a judgment lien may soon be filed against its assets.