When you’re running a business, bumping across confusing legal disputes is an inevitable experience. However, what if you’re dealing with a non-operating business entity? Can you sue a dissolved corporation? In this post, our team will answer all these questions and discuss the options you can consider to accomplish this process.
Can you Sue a Dissolved Corporation?
Process of Dissolving a Corporation
Before our team discusses your concerns about filing a legal complaint against a dissolved corporation, understanding different dissolution processes is a crucial step because this will determine how the court will handle the lawsuit.
Ideally, a business intending to dissolve according to state law must go through the winding-up procedure. In this dissolution phase, corporations have to settle their financial obligations, including debts and liabilities, to the creditors, claimants, and the state.
If you’re preparing to sue a business that has accomplished all state requirements for official closure, keep in mind that it’s very likely they already notified all their creditors and claimants about the dissolution.
Although this procedure limits a company’s liability, the question still stands: can you sue a dissolved company that had gone through proper winding-up procedures? Our short answer is, you can. However, expect a high chance that the court will throw out the case while considering this factor.
On the other hand, if you’re filing a case against a company that did not dissolve correctly, you have the upper hand. Some corporations that didn’t go through the correct dissolution process often try to dodge the obligation to pay creditors. In that case, the court ruling can be favorable to you.
Another scenario you may encounter during legal disputes is filing against an administratively dissolved corporation. And because the state forces these businesses to dissolve due to non-submission of annual requirements, common misconceptions imply that creditors and claimants cannot sue them.
Contrarily, these companies aren’t entirely dissolved but placed in a state of flux. This court order means that they can’t make legal actions unless reinstated by the state. However, it doesn’t prevent them from being served with lawsuits.
Suing a Dissolved Corporation
Lifting of the Corporate Veil
Typically, corporations and limited liability companies have a corporate veil that allows businesses and owners to be separate entities . This policy implies that shareholders are not liable for the disputes concerning the corporation in the eyes of the law.
However, here’s the catch: the court can nullify these terms. Given acceptable and legal circumstances, shareholders, officers, and any individual majorly involved in the business can be sued individually for debts or negligence.
This court action is often referred to as piercing or lifting the corporate veil. There are many considerations as to why the effectiveness of these protection terms gets void. One of them is the fraudulent purposes of a corporation.
If a company is revealed to have been involved in fraud deals and shareholders take part in egregious activities for corporate gain, then the court will pursue these members individually.
The perfect example of this is falsifying profits by orchestrating accounting and operations when there’s formerly none to attract funding from investors. Sadly, such cases are common within the business circle.
Other common individual actions that may pierce a dissolved corporation are incapacities, absence of corporate records, personal use of business assets, and co-mingling of funds.
There’s also lots to discuss in terms of corporate debts. Although owners are typically distinct from the business and their personal assets cannot be sought after, the particular case scenario where they can be liable is through payments made by the company and personal credit cards.
Other acceptable lawsuits could come from legally binding contracts like loans signed by the shareholder in question. In addition to that, if cases can be highly pursued through personal guarantees and collaterals (including assets owned by the members).
Another occurrence that may revoke one’s corporate veil is not abiding by state law. Providing inaccurate and insufficient information during the incorporation of the business could be a crucial factor for the court to consider a lawsuit.
Last but not least, a corporate business veil may be pierced if a corporation fails to maintain capital to continue operations and meet tax expenses. These remaining liabilities, if not yet settled through dissolution, could be passed to shareholders.
As corporate privileges could be abused easily, the concept of the corporate veil varies in every state. There are places where their state law clearly indicates that these protection perks have certain limitations, like in the state of Texas.
On top of all that, keep in mind that filing against a dissolved business entity is only allowed in a specific span of time. So if you’re planning to serve one, our advice is to file it within three years from the period of dissolution.
It may sound a bit tricky, but individually holding shareholders liable is the best way to reach financial settlements with a dissolved corporation. Assuming that all assets and funds had been liquidated and distributed upon dissolution, suing the business entity may not give you the outcome you want.
In the event a company did get sued with multiple lawsuits and choose not to cooperate, the court may grant these legal actions and proceedings to be directed to individual owners of the corporation.
Can you sue a company that is dissolved?
Yes, you can sue a company that is dissolved. However, there are specific circumstances where the court may allow to pierce a corporation’s veil. If the business didn’t go through a formal dissolution process and left unpaid debts, creditors and claimants can file a legal dispute against the business entity.
Aside from asking if you can you sue a dissolved corporation, it’s important to remember that each case varies from one another. Despite the power that the corporate veil casts upon businesses, our team would like to point out that this is not an absolute shield to escape legal disputes even after the dissolution process.