How to prevent liability after the sale of a business
HOW TO PREVENT LIABILITY AFTER THE SALE OF A BUSINESS
- DO NOT TERMINATE YOUR CORPORATION OR LLC. Most companies should maintain their entity structure for at least 3 to 5 years. Construction-related entities may want to keep their entities in place much longer since claims can occur many years into the future.
- MAINTAIN ADEQUATE TAIL INSURANCE in your ongoing entity (in the event of an “asset sale”). The continuing entity must have substance and not just be a shell. Having the appropriate tail insurance covers past liabilities that may come up post-closing. Tail insurance inside the entity also avoids the risk that a plaintiff will be able to “pierce the corporate veil” and go directly against the owners.
- If a “stock sale” (v. an “asset sale”) the new owner takes over the existing entity. REQUIRE THE NEW OWNER TO MAINTAIN INSURANCE COVERAGE SIMILAR TO YOUR PAST COVERAGE. Buyers who are much larger may have significantly greater “deductibles” and/or maybe self-insured. In either of those cases, a post-closing claim may not be subject to any insurance coverage and the seller would be liable for the full amount of the damages.
Properly addressing the “insurance issue” is critical to preventing seller post-closing liability.