Accountant Goes To Great Lengths To Avoid Paying Rent, Learns A Hard Lesson Instead

The "corporate reincarnation" strategy came to mind recently when a director/owner of a non-profit corporation in Oregon asked her own version of the following question:

Can my business avoid paying [the debt at-issue] if I simply shut down the current business and then open up a new business in its place?

This question is commonly asked when a business owner is determining how to avoid having to pay some debt his/her business is alleged to owe.

We might aptly call this the "corporate reincarnation" strategy.

Here's a common scenario in which the "corporate reincarnation" strategy comes up.

The director/owner of a non-profit corporation in Oregon wanted to try to find a way for her corporation to avoid having to pay rent to her corporation's landlord for the next three years. The rent was considered "an alleged" debt by this point, because her corporation had already failed to make a rent payment when it had come due.

Some key discussion points when considering this strategy

To this question, a business owner generally should first discuss, and understand, the underlying basis for his/her corporation's rent obligation. In the case of the director/owner of a non-profit corporation in Oregon who wished to avoid paying rent, for example, there was a signed lease agreement that said her corporation had to pay rent for the next three years. That was the underlying basis for his/her corporation's rent obligation.

However, that signed lease did not include a personal guarantee, wherein she, as director/owner of the corporation, had agreed to also be personally liable for her corporation's debts. So, she next led the discussion to how her corporation's "separation of liability" (from her personally) might insulate her from having any personal obligation to pay for her corporation's debts, in the event her corporation failed to pay rent when due. That shored up one of her big concerns, which was great. But there was still the issue of her corporation's liability.

So, she then shifted the discussion more narrowly to what her corporation itself might be able to do to avoid having to pay the rent, despite the signed lease agreement that said her corporation was obligated to pay. She proposed the following strategy:

What if I just closed down my current company and then opened up a new company in its place? Would closing down the company named in the lease, in effect, extinguish the obligation (or, at least, the only party obligated to pay that rent)?

(As you can see, the "corporate reincarnation" strategy is pretty easy to spot in the wild.)

In the end, her legal advisors told her then what I will restate to you now: you typically cannot avoid paying business debts by simply shutting down the current business and then opening up a new business in its place.

...and to illustrate that point, I will cite to a case from 2015, in which an accountant's tax preparation corporation in Washington state defaulted on a rent obligation of more than half a million dollars, and then tried to use the "corporate reincarnation" strategy to avoid having to pay that debt.

The accountant who tried the "corporate reincarnation" strategy but failed

In case to which we will now cite, in short, the accountant's business was in debt. So, he started a new business to try to avoid that debt. Did his plan work? Uh, no...no it did not. So, our citation to it now should be instructive for any business owner who is now considering the the "corporate reincarnation" strategy.

In the end, the court ordered his new corporation to pay the $523,000 debt incurred by his old corporation. So, the "corporate reincarnation" strategy failed terribly.

That is obviously a key takeaway--that the "corporate reincarnation" strategy failed to sidestep the debt, in the end--but I think the more useful takeaways are in understanding why that strategy failed, legally speaking. So, that's what I'll cover in the remainder of this article.