Can I Avoid Paying Business Debts by Shutting Down the Old Business and Opening a New Business?
We received another question from one of the listeners of The Crushing Debt Podcast: “I have an S-Corporation that is overloaded with debt. I don’t think I’ll ever be able to repay the debts of the company. Can I close my old company, then open a new company free of debt?”
Great question, and one we get asked often when consulting with business owners. Unfortunately, most of the time, our answer is “no, you can’t simply shut down one company and open another company,” because of three statutes in Florida – the Florida Revised Limited Liability Company Act, Florida Business Corporation Act, and the Uniform Fraudulent Transfers Act.
In winding up an LLC (Limited Liability Company), Florida Statute 605.0709(2)(a), controls: “In winding up its activities … a limited liability company shall discharge … the company’s debts.” Basically, the Florida Legislature is telling you that you must pay off the company’s creditors in order to properly wind up the business. Similarly, in dissolving a corporation, the company must pay creditors of the corporation by allowing them to make claims, and then pay those claims from the sale of assets of the company, under Florida Statutes 607.1406 and 607.1407. Therefore, in shutting down an LLC or Corporation, the entities must have a plan to repay, in whole or in part, the entity’s creditors.
Some clients then point out that if you simply fail to pay the renewal fee to the FL Secretary of State, the company will be dissolved by the State of Florida! While correct, in a situation like that, the owner(s) of the company may face personal liability if the company was improperly or involuntarily shut down because of a failure to pay the renewal fees to the State of Florida. Plus, the company owners will still potentially face liability under the Florida Fraudulent Transfers Act.
A transfer made by a debtor is a fraudulent transfer if the transfer was made with the actual intent to hinder, delay, or defraud any creditor, or without receiving a reasonably equivalent value in exchange for the transfer. In determining the debtor’s actual intent, the court will consider factors, including whether: (1) the transfer was to an insider, (2) the debtor retained possession or control of the property transferred after the transfer, (3) the transfer or obligation was disclosed or concealed, (4) the debtor had been sued or threatened with suit, (5) the transfer was of substantially all the debtor’s assets, or (6) the debtor was insolvent or became insolvent shortly after the transfer was made. This is not an all-inclusive list of the factors considered by the Court. Florida Statutes provide other factors the Court might consider.
If the old business shuts down and the new business starts up, how has the old business transferred anything to the new business? Did the new business take the desks and computers of the old business? The employees? The systems and processes? The customer lists? Office supplies (paper, pens, paper clips, envelopes, etc.)? Does the new business have the same address as the old business? The same owners? The same website (maybe a forwarded URL)? If the answers to these questions are “yes” then the creditors are more likely to prove that the transfer was fraudulent – made with the intent to hinder, delay or defraud the creditors and without receiving a reasonably equivalent value for the transfer (since the new company never paid the old company to acquire these personal and intangible assets).
If the Court finds that there was a fraudulent transfer of assets between the old and new businesses, the Court may: (1) avoid (unwind) the transfer; (2) attach the asset transferred; (3) issue an injunction against further transfers; (4) appoint a receiver to take charge of the asset transferred; or (5) levy against the asset transferred. The creditor can take these actions against the asset transferred, or any other assets of the new company. For example, assume that the new company acquires a piece of equipment unrelated to the old company – that new equipment is also subject to being levied to satisfy the debts of the old company if assets of the old company were fraudulently transferred to the new company.
How can the business owner shut down the old company and start up a new company without the debts of the old company and without the creditors of the old company targeting the new company? Bankruptcy, Chapter 7 (Liquidation) or Chapter 11 (Reorganization) could be a solution. The old company could choose an Assignment for the Benefit of Creditors (a process similar to bankruptcy, but subject to Florida State Law rather than Federal Bankruptcy Law). The debtor could negotiate with creditors to satisfy the debts for something less than the full balance owed.
For more information on Corporate Law, Bankruptcy Law, Debt Settlement Law and Fraudulent Transfers, please contact us to schedule a free initial consultation to discuss your options at 727-261-0224 or email me directly at firstname.lastname@example.org. Please also subscribe to the Crushing Debt Podcast, on Apple Podcasts, Spotify, and other podcast players, including Amazon Echo (“Alexa”) for more free information about these topics.
Shawn M. Yesner, Esq., is the host of the Crushing Debt Podcast and founder of Yesner Law, P.L., a Tampa-based boutique real estate and consumer law firm that helps clients eliminate the financial bullies in their lives. We assist clients with asset protection, the sale and purchase of real property, Chapter 7 liquidation, Chapter 13 reorganization, bankruptcy, foreclosure defense, debt settlement, landlord/tenant issues, short sales, and loan modifications in Tampa, Westchase, Odessa, Oldsmar, Palm Harbor, Clearwater, Pinellas Park, Largo, St. Petersburg, and throughout the greater Tampa Bay area.