Let’s fake my legislation agency signed a lease that turned out to be overpriced and burdensome. Aside from that lease, my legislation agency does very well, however I’d wish to see my agency get out from underneath this one dangerous lease.
Just a few latest chapter circumstances counsel an excellent escape hatch.
I can break my legislation agency into two corporations. A kind of corporations (“Unhealthy Firm”) stays answerable for the dangerous lease and a lot of the agency’s bank card payments. The opposite firm (“Good Firm”) retains the accounts receivable, the dear consumer and worker relationships, the legislation books (sure, we have now legislation books), the bar affiliation memberships, and no matter else makes a legislation agency worthwhile. Good Firm retains a lot of the financial institution accounts, however I throw sufficient financial institution accounts into Unhealthy Firm so I can say it’s a critical firm. Good Firm stops being answerable for the dangerous lease and the bank card debt.
Some states, reminiscent of Texas, enable corporations to interrupt in two this manner. The Delaware restricted legal responsibility firm legislation provides an identical mechanism. To make all of it work, I would have to terminate my unique firm and simply create two new corporations instead.
As soon as I’ve sliced and diced my legislation agency’s belongings and liabilities, all I have to do is put Unhealthy Firm out of business. Unhealthy Firm has some belongings. The chapter course of will take care of these belongings and Unhealthy Firm’s liabilities the identical as in every other chapter. There received’t be a lot for the owner or any bank card firm to get better, however there can be one thing. My legislation agency will efficiently keep away from legal responsibility for its lease, together with some bank card legal responsibility.
It’s an amazing plan. It additionally sounds fairly counterintuitive, even foolish. You’d suppose that when my legislation agency indicators a lease or incurs bank card debt, I shouldn’t have the ability to restructure my little empire in such a manner that my collectors lose entry to the belongings that may in any other case have backed my legislation agency’s legal responsibility to them.
Just a few latest giant bankruptcies counsel that my Unhealthy Firm/Good Firm plan may truly work, a minimum of if I have been the defendant in tens of 1000’s of lawsuits claiming that I bought merchandise that made folks sick. Within the chapter world, they name this plan the Texas Two-Step, as a result of it begins in Texas with the Texas legislation that permits an organization to slice off belongings and liabilities into a brand new firm. Only in the near past, Johnson & Johnson tried to try this when it confronted 40,000 lawsuits arising from its talcum child powder merchandise. Earlier than that, a number of different corporations did the identical factor.
Some individuals within the chapter system have argued that the Texas Two-Step is abusive and shouldn’t be allowed. I would agree, except I can use the identical method to do away with that dangerous lease and my undesirable bank card debt.