Asked in Business Formation, Business Law and Tax Law for Maryland

Q: Can someone abandon their LLC business and debt to then open a fresh new LLC offering and providing the same services

What is it called when someone abandons their LLC business, which is deeply in debt and owes back taxes, to then have someone else open a new LLC for them and that new LLC offer the very same services? Is it legal? It is essentially a one person business and without that person the new business could never have opened. This person is now making money doing the same thing as their original business, but isn't responsible for the financial burdens, they only get the rewards. They have many of the same clients and contacts and they are using the original business equipment and property at the new LLC. The old LLC is deep in debt and abandoned, they are not paying any of the debts or taxes of the old LLC. There is also false advertising on the new LLC website and it uses the old LLC equipment and property to promote the new LLC. Basically, they just changed the logo and color scheme, but are the same business. What entity needs to be contacted, where do you go from here

1 Lawyer Answer
Mark Oakley
Mark Oakley
  • Rockville, MD
  • Licensed in Maryland

A: More facts would be needed, but it is possible to pierce the corporate veil of the new company and go after the owner personally, or unwind the transfers of assets to the new company, under the theory of fraudulent conveyance, as well as violation of the Limited Liability Company Act that requires a dissolving company to pay off all its creditors using the company's remaining assets (e.g., selling off those assets), including applying accounts receivables received for products and services performed by the dissolving company before dissolution, etc.

A fraudulent transfer is a transfer made with intent to hinder, delay, or defraud a creditor, or without receiving fair value in exchange for the transfer. In determining the debtor’s intent, a court will consider whether (1) the transfer was to an insider, (2) the debtor retained possession or control of the assets transferred, (3) the transfer was disclosed or concealed, (4) the debtor was being sued or threatened with suit, (5) the transfer was of substantially all the debtor’s assets, and (6) the debtor company was insolvent or became insolvent after the transfer was made. Other factors may be relevant. Did the new business get all the furniture/computer equipment of the old business, the employees, the systems and processes, the customer lists, office supplies (paper, pens, etc.)? Does the new business use the same address, owners and website (or a forwarded URL)? Did the new company get all these assets without fair payment? If yes, you are more likely to prove a fraudulent conveyance.

If there was a fraudulent transfer, a Court can set aside (unwind) the transfer; attach the assets transferred; issue an injunction against further transfers; appoint a receiver to take charge of the assets; levy against the assets. A creditor can can pursue both the assets transferred as well as any other assets of the new company. In other words, if the new company acquires new assets unrelated to the old company, those new assets are now subject to levy to satisfy the old company's debts.

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