Corporate Lien: What It Means and How It Works

What Is a Corporate Lien?

A corporate lien is a legal claim placed by an entity against a business for money owed to that entity. A corporate lien is usually placed on a business for a debt or unpaid bills owed to another business. Corporate liens may also be used to recover back taxes owed to the government. 

A corporate lien is placed on the debtor company's assets to record that the company has outstanding financial obligations. The presence of a corporate lien is important information for shareholders and potential buyers of a company to be aware of. 

How a Corporate Lien Works

Corporate liens are a type of lien that is used against a business rather than an individual. Placing a corporate lien on a business requires a court order that states that the company is in arrears for money owed to another entity.

Once a court order asserts that the money is owed, that claim is filed and attached to registered assets of the business. After the corporate lien is filed, the assets subject to the lien cannot be sold freely by the company because they have an encumbrance.

There are instances when more than one outstanding lien will be in place against a business. If the business fails, the order of the lien holders matters greatly in terms of who will get paid back. More liens on a business present more risks for future lenders (and existing and future shareholders). Lenders are less likely to take on risk when other creditors have payment seniority.

Corporate Liens vs. Personal Liens

Similarity

Corporate liens work like personal liens. When a bank finances a personal automobile loan, it holds a lien on that automobile's title until the loan is paid back in full.

The core purpose of a lien is to guarantee a loan. In the event the loan is not paid off in full, the creditor has the legal right to take possession of the asset that the lien secures, in this case the automobile. A lien is essentially a form of collateral, where a borrower puts up something of value they own in exchange for securing new credit.

Difference

Personal and corporate liens differ in that a corporate lien can become a type of investment in and of itself. If a company cannot meet its obligations, investors can purchase the corporate lien and settle on their own with the lender.

Examples of this are most often seen in the area of unpaid back taxes, where a company suddenly must pay large amounts in back taxes, plus penalties. In these cases investors may step in to prevent bankruptcy and to negotiate new lending terms.

Should the company declare bankruptcy in the end, holders of the corporate lien are likely to be given priority over others waiting in line to be repaid, including stockholders.

Special Considerations

For Potential Buyers of a Business

Legally, a lien must be disclosed as part of a business purchase process and may not necessarily be a deal breaker depending on the history of the lien. However, if a company is in the process of disputing the legality of a lien, there may be a justification for that company not paying it off or settling it in advance of a sale of the business.

Do Your Research

If you are considering buying a business, do your own research to discover whether or not there are any corporate liens held against the business. Don't depend solely on the seller's disclosures.

There are publicly available databases to help potential buyers search for outstanding liens. The three kinds of searchable liens are UCC liens, tax liens, and judgment liens.

1. A UCC lien is a creditor's public notice that it has an interest in a company's assets. It is filed with the Secretary of State’s office in most U.S. states.
2. A tax lien for unpaid back taxes typically is also filed with the state in which the business is headquartered.
3. A judgment lien is filed when a legal judgment has already been made and is often filed in local county courthouses.

You can also hire someone who is familiar with these types of lien searches to do the work for you. Either way, good research can help you to avoid any post-sale surprises, including costly legal action against the seller.

The Bottom Line

A corporate lien is a legal claim against a business for money owed and represents the legal right of a creditor to a company's assets. Corporate liens can also be placed by the federal government on a business in an effort to obtain taxes the company owes.