Let’s say you purchase a pre-existing business. After the purchase, you realize that the company owes a lot of money to a lot of people. Or, your own business ends up with judgments or other debt against it. In either scenario, you want to get out of having to pay back all of those funds. Can you just close the business and re-open or re-incorporate it under a different name?
Will it Work?
It sounds like that would work, because after all, every legally registered company is its own separate entity. If the company that owed money is no longer in existence, then the creditor has nobody to collect any money from. In fact, you could conceivably do this over and over again—incur debt, close, and reincorporate. Or could you?
It turns out that’s not so easy, because even though your “new” company has a different name and perhaps even different articles of incorporation, it may not actually be new.
Just an “Alter Ego?”
Yoru creditor can, and will try to enforce the debts of the old company, against your new one. And it’s an argument the courts may pay attention to. Courts take a “big picture” approach; they don’t care that legally your new company is a different company—the court will look to see if:
- The new company is in the same business as the old one
- The officer, directors, or owners, are the same as the old company
- The company operates out of the same physical location as the old
- The old and new companies use the same websites or URLs
- The proximity in time, between the closing of the old, and the opening of the new business
- Any other similarity between the old and the new company
Basically, courts will want to see if the new company is just an “alter ego” of the first—which, for those seeking to evade judgments, it usually is. Courts will ask if the old business merely “handed off” its business affairs to the new company. If so, it’s likely the new company is liable for the debt of the old.
Purchasing is No Help
The fact that you may have purchased the business with the debts, won’t help you either.
Mere change of ownership does not extinguish the company’ existing liabilities or debts, which is why liabilities are so important to look into, when you’re considering purchasing a business. Some of those liabilities may be in the public records—like a court judgment—but others, like a contractual dispute or claim may not have materialized into a full blown lawsuit yet, and thus, may not be discoverable in the typical public records search.
Often, purchasers will work out agreements with the seller, on how to satisfy existing debts, before finalizing a business purchase. That may include agreement to indemnify for lawsuits or judgments.
Call our Fort Lauderdale business lawyers at Sweeney Law P.A. at 954-440-3993 today for help with your business law questions.
Sources:
floridabar.org/the-florida-bar-journal/successor-liability-issues-in-labor-and-employment-cases/
ir.law.utk.edu/cgi/viewcontent.cgi?article=1576&context=utklaw_facpubs
By Sweeney Law, PA | Posted on January 17, 2024
