My business has credit problems, can I just start a new business and start over?

My business has credit problems, can I just start a new business and start over?

We are often asked about starting multiple businesses for clients.  There are different situations that prompt this request. Sometimes, a prior business failed and an owner may want to start over.  Sometimes the owner wants to protect different parts of their businesses in the event one fails.  Sometimes the owner wants to bring partners in for part of a business or has separate financing.

Our Sixth Circuit Court of Appeals in Helena v Great Lakes Grain, a recent case successfully argued by Ronald J. VanderVeen, issued a decision that respects the separation of businesses.  The Court noted that Michigan law generally respects the separate status of businesses in Michigan, even if they have common owners. Thus, if a person starts two businesses and operated them separately, the creditors of one will not be able to impose liability for a debt incurred by one business on the other business. 

This general rule has exceptions.  If the owners do not respect the separate status of the businesses, the courts will not respect the separateness either.  If the owners use the separate businesses to deceive or defraud others, the courts will not respect their separateness.

But if there are legitimate business reasons for having separate businesses, the Courts will respect the separate status of separate businesses, even if they have the same or related ownership. That was the result in Helena v Great Lakes Grain.  The Court refused to impose liability for the husband’s unpaid business debts on the wife’s and son’s separate businesses, even though their businesses started after the husband failed and they were engaged in the same type of business. 

This area can be complicated. Business owners and creditors should get legal advice before dealing with multiple commonly owned businesses to avoid unintended consequences.

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