Cliff Ennico

"I have been running a service business for the past several years, but business is way off and I'm thinking of calling it quits.

I have a corporation and am thinking of shutting it down by year-end so I won't have to file tax returns for the bloody thing after next year. I'm worried, though, that I might be exposing myself to personal liability if I'm sued after I shut the corporation down.

What do people normally do in a situation like this?"

The decision to shut a corporation down is never easy, but if you're going to do it, the end of the calendar year is a great time.

Here are some of the questions you will need to ask your advisors:

1. Is there a risk I might be sued in coming years? Generally, when a corporation dissolves, it continues in business for the sole purpose of winding up its affairs. This means that it can't take on any new business after it dissolves, but it can clean up old business such as collecting accounts receivable, paying debts and so forth.

In most states, this applies also to lawsuits -- if your corporation has breached a contract or injured someone and you did not personally guarantee anything, the plaintiff would be forced to sue your corporation even if the suit is brought after your corporation is dissolved.

Of course, your corporation probably will not have any assets to satisfy a judgment, so this increases the likelihood that a plaintiff will attempt to pierce the corporate veil and attack your personal assets on the theory that your dissolving the corporation was done solely to cheat the plaintiff of its day in court.

If your corporation was properly formed and you have been scrupulous about your corporate paperwork, that argument probably won't stand up in court. Still, if there's any doubt about whether or not your corporation is liable to someone, you should:

-- see if your corporation's liability insurer will issue a tail policy covering any lawsuits brought from the date of dissolution until the expiration of the appropriate statute of limitations period (usually three years). If it does, have your corporation buy the tail policy before it dissolves

-- talk to your attorney for advice if someone has threatened to sue you, or something has happened (for example, a slip and fall accident) that you know is likely to lead to a lawsuit

Cliff Ennico

Cliff Ennico's "Succeeding in Your Business" column offers straightforward small business advice and tips

Be the first to read Cliff Ennico’s column. Sign up today and receive delivered each morning to your inbox.


Get the best of Townhall Finance Daily delivered straight to your inbox

Follow Townhall Finance!