Can You Be Sued After Closing a Business? Personal & Business Liability

At the end of a company’s life, the business owners close it down, a process called “dissolution” or “winding-up.” It sounds final, as though nothing needs to be done again. That may not be the case. Depending on the type of business or the way you and your partners closed things down, you could find someone taking legal action against your business.

Closing a business is more complicated than writing a final round of paychecks and hanging a “Closed” sign on the door. You may need to send notices to various state agencies, pay off creditors and outstanding debts, and complete any existing orders before you are officially closed. Some of these events can lead to legal claims.

Why Can My Business Be Sued After It Closes?

Dissolving a business involves paying debts, workers, and loans. If you’re lucky, you and your business partners may have some money left over. Sometimes small business owners convert a sole proprietorship or partnership into a limited liability company (LLC) to relieve themselves of personal liability in the event of a lawsuit.

If the owners fail to dissolve the company properly, the business and the owners are still liable for some things. Some of these can include:

• Failure to pay outstanding debts: You must notify all creditors you’re closing the business and either pay your bills or enter a settlement agreement. Some businesses ignore this step and wind up in small claims court over amounts they forgot, but their creditors did not.

• Failure to complete the process: Just like starting a business, ending it is time-consuming, requiring you to notify the Secretary of State that your business is officially closed. You must also file your final tax returns, which may not be due until the following year.

• Failure to pay final paychecks or follow other personnel requirements: Many state laws require companies to pay final paychecks on the day of the shutdown. Under the federal WARN Act, covered employers generally must provide at least 60 days’ written notice before certain plant closings, or mass layoffs, although there are definitions, thresholds, and exceptions that can apply. You should ask a business lawyer in your area which laws apply in your case.

• Internal disputes: If, for instance, you dissolved your company because of arguments with partners or other stakeholders, they may bring legal action against the dissolved corporation for breach of contract or other claims. You need an attorney if your company had any internal arguments before winding up.

• Personal injury claims: The statute of limitations on product liability claims varies from state to state. These laws allow lawsuits whenever a flawed product injures someone. These suits can happen after your business is already closed.

Preparing for a Post-Dissolution Lawsuit

Don’t ignore the lawsuit even if your company is long out of business, and don’t try to handle it alone. In some states, a dissolved business continues to exist for limited purposes, such as winding up and suing, or being sued, and some states set a specific survival period, while others allow suits after dissolution subject to the normal statute of limitations, or allow the period to be extended. How long this takes varies by state and by whether the company dissolved voluntarily. You need legal advice from a business attorney for this situation.

Keep Business Records as Required

Federal and state laws tell you how long you must keep your business records regardless of when the business is dissolved. For example, specific records such as tax returns, employment records, and financial statements must be kept for a set number of years. In many cases, you must keep records at least until the Secretary of State cancels the business entity. If your business is in good standing with the state, your records will help your attorney disprove any claims against you.

If your dissolution included selling or transferring equipment or fixtures to another company, keep records of the items, including serial numbers. These items have an unhappy habit of becoming sources of litigation many years later.

Maintain Your Insurance Policies

Before dissolving your business, talk to your insurance company about extending your commercial liability insurance. Your company’s insurance may cover post-dissolution legal action. This coverage must be in place before you finish your corporate liquidation.

Keep Some Assets in Reserve

Manufacturing and distribution companies should consider the possibility of future action due to product liability. Just because a company has closed will not prevent a claimant from filing a claim. Fighting the case will cost money, even if you can show your company has been closed for the statutory amount of time. Keep some funds in reserve for emergencies.

Let Your Lawyer Handle the Case

If you receive a complaint or other legal document, give it to your attorney as soon as possible. If an injured person or an attorney claiming to represent them calls you, tell them they must speak with your attorney. Once you have an attorney, never talk to anyone involved in a legal case.

If they call you before you have an attorney, get contact information and advise them your attorney will be in touch. Never argue with anyone about a legal matter without an attorney present.

Get Good Legal Advice

Not all attorneys can handle the type of claim you may face after your business shuts down. Take time to research your local business law attorneys and find the one who suits your needs.