While some businesses succeed, others are not as successful and may struggle with crippling debt. Creditors may sue your business and obtain civil judgments for debts that your business owes. When this situation occurs, you may be tempted to dissolve your business and start fresh with a new business. However, you must understand the law that governs these transactions and when the new business would be liable for the old business’s debts.
Legal advice on business creation and dissolution is critical, particularly when business creditors are involved. You can rely on a Florida business law attorney at Kramer Green to explore all available options for handling creditors and continuing to operate your business in some form.
Generally, a successor business entity does not take on the liabilities or debts of its predecessor entity. In other words, if a corporation dissolves and its former owners create and begin operating a new corporation, the new corporation is not automatically responsible for unpaid debts of the now-dissolved corporation.
However, this general legal premise does not mean that the owners of a failing business may leave that business and pick up the business where they left off in a new business entity to avoid responsibility for the old business debts. A successor business entity can be responsible for the debts of its predecessor entity under specific circumstances, particularly when the two business entities share the same owners, directors, offices, etc.
The Successor Business Has Expressly, or Impliedly Assumed the Debts of Its Predecessor.
If the successor business entity either explicitly or impliedly assumes the debts of the predecessor business entity, it will be responsible for paying those debts. For instance, if the predecessor business entity owes a debt to a supplier, the supplier likely will only do business with the successor business entity run by the same persons if the previous debt is paid. If the successor business entity makes a payment arrangement for the debt to open an account with the supplier, it has explicitly assumed the debt of its predecessor.
The Transaction is a De Facto Merger.
Sometimes, the transaction may be such that the predecessor business entity merges in effect with the successor business entity. Typically, a de facto merger occurs when new business continues the enterprise of the old business, there is a continuity of owners, officers, and employees and the same address and telephone number, etc.
The Successor Business is a Mere Continuation of Its Predecessor Business.
Under the legal theory that the successor business entity is the mere continuation of its predecessor, the court considers whether the two entities have a common identity of officers, directors, managers, owners, and business. The inquiry is whether the successor is merely a continuation or reincarnation of the predecessor business. A change in the name of the company and/or location does not necessarily mean that the two companies are separate entities, especially if they share the same management and personnel. See, e.g., Centimark Corp. v. A to Z Coatings & Sons, Inc. and A to Z Coatings, Inc., 288 F.App’x 610 (11th Cir. 2008) (applying Florida law).
The Transaction is a Fraudulent Attempt to Avoid Paying the Debts of the Predecessor Business.
In some cases, the transaction may be a fraudulent attempt to avoid paying debts that the predecessor business owes.
Let Us Help Protect Your Legal Interests Today
A business law attorney at Kramer, Green, Zuckerman, Greene & Buchsbaum, P.A. stands ready to help protect your legal interests throughout the life cycle of your business. We understand how hard you have worked to build your business, and our goal is to protect and advocate for you and your business to the greatest extent possible. Contact our office today at (954) 966-2112 or reach out to us online to schedule a time to discuss your business law matter with our attorneys.