June 27, 2017

Closing a Failed Business and Starting Another Like It

Life is UnfairI have written this letter at various times to deal with the legal obstacles to closing an unprofitable business and getting a “fresh start” with another one. The primary legal obstacle is called “successor liability”

[note]Dear (Business Owner):

I understand that you have essentially been self-employed and wish to continue in the same line of work. I also understand that your present business is not economically viable. This naturally leads to the conclusion that you must close the old business and start a new one. Unfortunately, starting a business that does essentially the same thing as the old business involves unavoidable risks of which you should be aware. 

There is a concept in the law known as successor liability. This allows a creditor to sue a company that acquires the assets and business of an existing company with intent to leave the debts of the old company behind. The seminal case in North Carolina is Quebecors,
which holds that the most important element in determining liability is continuity of ownership. Other things such as using a similar name, telephone numbers and advertising; keeping the same plant and equipment; maintaining the same employees; and using old company’s inventory and accounts receivable are also considered in determining successor liability. To put it simply, if the new company has the attributes of the old company, you can have successor liability.

Thus, in starting your new company, you must strive to make it as different from the old one as possible. There must be new bank accounts and tax numbers. The name should be sufficiently different as to not have an obvious connection. You should not carry over plant and equipment, accounts receivable, or inventory to the new company.

I understand that in a perfect world there would be no connection between the new company and the old company. Unfortunately, the world is not perfect. At the very least, you, yourself, will be a connection. There is likely to be some use of the old company’s assets and employees in the new company, too. Thus, there will be some degree of the unavoidable risk of a creditor attempting to assert successor liability. You can do everything right and STILL face the threat of successor liability.

You must be aware of the risk of successor liability. Your decision to start the new company must involve a decision that the risk is worth taking. [/note]

Of course this letter is not written to you, and is not intended as legal advice. For a legal opinion on your circumstances, please make an appointment for a bankruptcy counseling session.