Out of Business But Still Liable?

You close your company and start settling into retirement. Three years later, you get a call from a former client saying that the roof your company installed is leaking and that the homeowner would like to make a warranty claim. 

Are you still responsible?

As with many things in the law, the answer is “it depends.” Some companies that close their doors will only have a brief exposure period following their dissolution. Others, however, could face warranty liability well into the future. What makes the difference?

What type of business entity were you operating?

Corporations and Limited Liability Companies (LLCs) shield individual business owners from personal liability for business obligations. Generally, a business owner who dissolves her LLC or corporation will not be personally liable for warranty claims against the business. Other business entities, such as sole proprietorships and certain partnerships, however, do not provide such protections. These types of companies expose their owners to personal liability for any remaining business obligations—including warranty claims—following the closure of the business.

Did you take the proper steps to close your business?

Whether you have continued liability for warranty work may depend on whether you followed the appropriate procedure to close your business. For example, if you operate an LLC, you have to follow a specific set of procedures to dissolve your company. These may vary by state and include things like filing articles of dissolution and publishing public notice that the LLC is planning to close. 

If the LLC follows the proper procedure when closing its doors, its potential for liability will expire within a set time period (often three years after dissolution). If the LLC is not dissolved in accordance with state law, however, the company could be on the hook for warranty work well into the future, depending on the length of the warranty.

Did the business owners respect corporate formalities while the business was operating?

Even where a company has been dissolved, a court may allow a homeowner to “pierce the corporate veil” of a company on a warranty claim, which would put the business owner’s personal assets on the line after the business has closed. Veil piercing can occur when a company fails to follow proper business formalities, intermingles personal and business assets, is undercapitalized, and/or commits fraud. We will explore ways to prevent veil piercing in future articles.