Legal Question in Business Law in California

What did you buy - stock or assets? If you bought stock you may well be liable. If you only bought assets you are going to be liable for any prior liens on those assets but not for general unsecured debts of the business. It may also depend on what your agreement with the seller says.

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Yes, if you purchase a business and change the name, you (the business) can be, under certain circumstances, legally responsible for the businesses' debts and liabilities, including tort or product liabilities that occurred prior to your purchase. Those risks can be minimized and eliminated completely with careful planning.

As a director, you can also be held personally liable to a corporation's creditors if you distribute funds to the corporation's shareholders, even if you are the sole shareholder.

You should not rely on any of the advice the other attorneys have given you, because you did not provide a fraction of the facts that would be needed to answer your question reliably. Whether or not the successor to a business winds up with the liabilities of the business from before the change of ownership is the subject of weeks of law school corporations class, volumes of law books, and hours and hours of attorney time when a sale of a business is properly negotiated and documented. Often the new owners are willing to take on the liabilities to reduce the purchase cost. Other times they want to effectively close the old business and use its assets for their own purposes. To do that, however, you cannot leave the old business without resources to pay its debts or you may wind up with the liabilities reaching the new business anyway. This is a very complex area of law, not one that can be answered the way these other attorneys have done. You need to have your particular situation evaluated in detail before the question can be answered correctly.

As the attorney notes, this is a very complex area of law and more facts are needed to answer the question. What kind of business is involved? Is is a sole proprietorship, partnership or corporation. If a corporation, was the stock sold or just assets, minus liabilities or what? Consult with an attorney in your area for specific advice.

Kevin B. Murphy, B.S., M.B.A., J.D. - Mr. Franchise

Franchise Attorney

Kevin B. Murphy, B.S., M.B.A., J.D. - Mr. Franchise

Franchise Attorney

Someone should add that California's Commercial Code includes a section on "bulk sales" - meaning sales of a large part of the inventory and/or equipment of certain businesses. The is codified as sections 6101-6111 of the Commercial Code. A major thrust of this law is to make sure creditors of a business are notified and protected to some degree when such a sale of assets is to occur. Failure to comply can increase the exposure of buyer and seller to legal action by creditors. However, the law does not apply to all types and sizes of business.

In general, the Legislature and courts have been careful over the centuries to design and implement laws that attempt to enforce integrity on transfers of businesses, so that neither creditors or minority stockholders can get too badly burned by a transaction in which they didn't participate. These include the Bulk Sales law, court decisions making corporate directors trustees for the creditors in a liquidation, laws in the Corporations Code against corporate dividends and distributions that harm creditors, the Uniform Fraudulent Transfers Act, and many others. Without any more facts than you've provided, it's reasonable for an attorney to generalize and say that a business-acquisition transaction that doesn't make a reasonable provision for the creditors and minority stakeholders (partners/stockholders/ LLC members) is going to be vulnerable to legal attack, in which the seller, the buyer, or both, will be called upon to defend and perhaps pay damages.