Using LLC Capitalization
The LLC capitalization technique involves two people forming a LLC to run a legitimate business (such as investing in stocks and bonds.) Under the LLC statutes of every state, each LLC member can obligate the other in a written agreement to contribute capital to the company so that it has a means to operate. If one member contributes a smaller amount of capital to form the company (in exchange for a small but significant ownership interest, typically less than 5%), the other member promises to make a large capital contribution over time, in exchange for an upfront large interest in the company of the remaining percentage of ownership. Because the first member contributed capital up front but the second member did not, the LLC can place a lien on the second member's property to ensure that he fulfills his obligation to capitalize the LLC over time. Provided that the LLC is not considered an insider under any applicable fraudulent transfer laws and the debt is valid and is a logical business transaction, a bona fide lien can be placed upon the second member's property.
The promise by the second LLC member can assume many forms of value including a promise to contribute cash, services, equipment or other property. When the lien expires the members can dissolve the LLC and return the original capital. Additionally, equity can be stripped from any asset using this technique (accounts receivable, real estate or personal property) and provided that the process follows traditional business practice standards, a great deal of flexibility is available in the capitalization and equity stripping process.
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