Should successor companies worry about litigation?

Should successor companies worry about litigation?

On Behalf of | Jan 11, 2024 | Business And Commercial Law |

If you have owned a business that failed, you might take the lessons learned from running the enterprise and create a second one from the ashes. However, should you own a successor company, be aware that launching one could present some potential litigation risks.

A successor company is a business that takes over the assets, employees and often the product lines of a failed predecessor. This continuation of the old business may prove successful, provided you avoid possible legal pitfalls when creating and operating your new company.

Company liabilities

Successor businesses are not automatically liable for the debts and lawsuits of the companies they replace. Still, there are exceptions that leave them vulnerable.

If a successor company expressly agrees to take on liabilities from the old business, it becomes legally responsible. Verbal agreements also get successor companies into legal trouble, such as if you verbally accept responsibility for outstanding issues from the last business.

Additionally, if a court determines a failing company transferred assets to a successor mainly to avoid debts or lawsuits, the new company assumes those liabilities. Any business owner should be careful about transferring business assets to a second company when legal action looms.

The continuity of the companies

Courts can also rule that a successor business is just a continuation of the old company with a new name. If most assets, staff, operations and products stay the same, judges may decide no real change occurred, resulting in shared liability. A wise step is to make significant changes from your old company when creating a new business to avoid this risk.

Statistics have found that Mississippi showed a net increase of 623 businesses between March 2020 and March 2021, with more businesses opening than closing. With precautions, your successor company may join the state ranks of successful businesses and escape the liability of a prior operation.