Whether buying an existing business or winding a fledgling business down in anticipation of starting a new one, entrepreneurs would do well to consider the implications of the successor liability doctrine.

A recent Georgia Court of Appeals decision imposed liability on a corporate successor for the debts of its predecessor.  In that case, a homeowners association (HOA) hired a contractor to perform extensive repair work, but failed to pay for it.  When the contractor filed suit to collect, HOA’s board members caused a new entity to be formed – effectively HOA-II – and then transferred all of HOA’s assets and rights to HOA-II.  The contractor won at trial, only to find HOA to be an empty shell when it tried to collect.  The contractor then brought suit against HOA-II, seeking to hold it accountable for the HOA’s debts.  The Court ultimately agreed, finding a “substantial identity of ownership and a complete identity of the objects, assets, shareholders and directors” of HOA and HOA-II.

What does this mean for business owners?  Forming a new entity and simply transferring the assets of an old one to it may not insulate the new entity from the debts of the old one.  The more similarities there are in ownership, operations, control, and assets between predecessor and successor entities, the more likely that the successor liability doctrine will apply, exposing the new entity to the debts of the old one.

For every business owner terrified at the prospect of having her new business held liable for the obligations of her old one, there is another business owner encouraged by the possibility of collecting on a debt that is long past due.  Whether used as a shield or a sword, experienced counsel can assist business owners in the successful application of the successor liability doctrine.