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What are pros and cons of forming a successor company?

On Behalf of | Jul 1, 2021 | Business Law |

You might be one of many entrepreneurs that has started a business only to find the experience had not turned out as you hoped. You may have closed your business, perhaps using Chapter 7 bankruptcy. Still, you are sure with some changes, you can make your business ideas work again through a successor company.

A successor company, according to Chron, is one that rises from the ashes of a previous company. You might find associating your new company with your old one may work to your benefit. However, some business owners experience problems with a successor company.

Advantages of a successor company

With a successor company, you do not have to start from scratch. You have the assets from the previous business to work with. You can also retain your employees from the old company. This saves money you would have otherwise spent on hiring new workers or acquiring equipment and inventory. Instead, you can channel business assets into marketing or innovation to help you build a larger customer base.

Disadvantages of a successor company

Generally, a successor company is not responsible for the liabilities or debts of the previous business. But this will depend if your company truly is a different company than the previous one. If you end up in litigation, a judge might rule that your new company is just a continuation of the old one, or that you only formed the successor company to avoid paying debts or liabilities.

You may also run into trouble if a judge believes your company has assumed liabilities or debt by implication. For instance, if your old business made payments to a creditor and your new company has resumed those payments, a judge will probably conclude your current business has the responsibility to pay your old company’s debts.

Structuring your new company

Weighing the pros and cons of making a successor business is a good move before actually creating one. You might decide a fresh start is in order and create a business with a different structure, different services or goods, and different leadership. This could distance your new operation from the liabilities of your previous company.

Founding Partners Damaso W. Saavedra and Allyson D. Goodwin