Any time a group of folks get together to start a new company or a company brings in a new owner, there is a significant chance that one of the owners will come into the venture with significant outstanding liabilities. These liabilities often lie with judgment creditors from a past venture that may have failed or even debts owed through a divorce.
The owners must absolutely be honest and discuss these issues early in the process whether it is forming a new business or bringing in a new owner. In most cases, and certainly when bringing in a new owner, the stakeholders would be wise to engage in some form of due diligence with regard to the new owner to make sure there are no liabilities that have not been disclosed. In the case of a new venture, the existence of any judgment creditors should be disclosed so the company can take the appropriate steps to protect itself and the other owners.
The reason is simple: you don’t want to find yourself in business with someone you didn’t expect. Certain types of ownership interests are subject to seizure or turnover. This means that certain types of ownership interests are subject to seizure by judgment creditors. The result is, should such a seizure occur, the judgment creditor largely steps into the role of the owner.
This isn’t about hiding assets or attempting to prevent judgment creditors from collecting on their judgments. This is about protecting the interests of the other owners. Who you go into business with is an important and personal decision. Proper planning can help make sure that you don’t run into a surprise down the road.
The appropriate tools and methods for protecting the the other owners will vary based upon the stage of the business and type of entity. For example, the existence of judgment creditors (or potential) is one factor that influences the entity selection process for a new company. For going concerns, the existence of judgment creditors may require additional terms and documents (such as a buy-sell) prior to bringing the new owner into the company. In either case, through disclosure and proper planning the issue can be addressed so that the other owners, as well as the business, are protected.