Properly Closing Your Corporation
People form corporations for many purposes, but one main reason is liability protection. If you form a corporation, set up and follow your bylaws, and run the corporation properly, then any judgment against the corporation is solely the corporation’s responsibility; your personal property is protected.
However, if you improperly manage the corporation, a court could find you personally responsible for the corporation’s liabilities. This occurred in Smith v. Kelly, 484 Mass. 111 (2020). While the Court acknowledged this was a unique case, it still found personal liability against the Defendant; or to put it another way, it pierced the corporate veil.
The facts are that the Defendant had a law firm (“Firm”) formed as a corporation. One of his employees defrauded the Plaintiff. The Plaintiff sued the Firm and obtained a judgment. Immediately after the judgment, the Defendant closed the Firm and opened a solo practice. Plaintiff sought to enforce the judgment and filed a separate action to collect against Defendant personally. In response, Defendant placed the Firm into bankruptcy to avoid the judgment.
Although Defendant’s Firm was a corporation and it went through bankruptcy, the Court eventually found personal liability against Defendant. The Court’s reasoning was if the entity is just a continuation of the old corporation (and its change was to escape debt), then liability can be found on the new entity. Here, the Defendant’s new solo practice was identical to his Firm. While Defendant argued the differences -- that is was a solo practice, not a law firm with employees -- the Court did not buy the argument. The Court found the solo practice kept the equipment, location, bank account, and supplies. It also found that the Defendant had the former clients pay right into the solo practice, not back to the Firm.
In the end, the Defendant was personally liable for the judgment even though the judgment was against his corporation.
That does not mean this will always happen. If you plan to dissolve your corporation, speak to me. We will work together to make sure it is done correctly. And more importantly, we will do it the correct way to make sure any creditors cannot come after you personally after you shut down the corporation. Done correctly, after a corporation is closed, there will be no personal liability. Feel free to reach out to discuss this if you plan to close your company.