Insights

Carrying on Business in the Name of a Dissolved Corporation Can Lead To Personal Liability For Its Officers

March 18, 2013      |      Andrew C. Voorhees, Esq.   

It is generally known that incorporating a business provides protection against personal liability for its officers and directors. A corporate entity is deemed to be a separate and distinct entity from its owners and operators, making the attractiveness of incorporating evident. However, failure to keep a corporate entity in good standing with the secretary of state can lead to personal liability for business owners who continue to conduct business in the defunct corporate entity’s name.

In Ohio, the General Assembly has made clear the powers and duties of corporate directors upon dissolution of the corporate entity. Ohio Revised Code § 1701.88(A) provides:

When a corporation is dissolved voluntarily, when the articles of a corporation have been canceled, or when the period of existence of the corporation specified in its articles has expired, the corporation shall cease to carry on business and shall do only such acts as are required to wind up its affairs, or to obtain reinstatement of the articles . . . and for such purposes it shall continue as a corporation for a period of five years from the dissolution, expiration, or cancellation.

Under this Statute, when the articlesof a corporation are canceled,whether by the Secretary of State or otherwise, the authority of the corporation to do business ceases and after such termination officers who carry on new business do so as individuals, lose the protection of the Corporation Act, and are personally responsible for such obligations as they incur.  Chatman v. Day (1982), 7 Ohio App. 3d 281, 282. “[U]pon the corporation's death, those officers, directors or shareholders who continue to engage in corporate business other than winding up the affairs of the company will be held personally liable for such activity. Id.

Other jurisdictions have analogous statutes to Ohio Revised Code § 1701.88(A). For example, see N.J. State. Ann § 14A:12-9(1); §351.486 R.S. Mo.; Va. Code Ann. § 13.1-752; Utah Code Ann § 16-10a-1405; (5) Tex Tax Code § 171.255; 805 ILCS 5/3.20; KRS § 27113.14-050; Fla. Stat. § 607.1421; Mont. Code. Anno. § 35-1-935.

(1) Fill vacancies; (2) Elect officers; (3) Appoint agents, liquidators, or other entities or persons to carry out the winding up of the corporation's business; (4) Carry out contracts of the corporation; (5) Make new contracts; (6) Borrow money; (7) Mortgage or pledge the property of the corporation as security; (8) Sell its assets at public or private sale; (9) Make conveyances in the corporate name;  (10) Lease real estate for any term, including ninety-nine years renewable forever; (11) Settle or compromise claims in favor of or against the corporation; (12) Employ one or more persons as liquidators to wind up the affairs of the corporation with such authority as the directors see fit to grant;  (13) Cause the title to any of the assets of the corporation to be conveyed to such liquidators for that purpose; (14) Apply assets to the payment of obligations; (15) Distribute the remainder of the assets either in cash or in kind among the shareholders according to their respective rights and interests after paying or adequately providing for the payment of all known obligations of the corporation under section 1701.882 of the Revised Code and for claims that have not been made known to the corporation or that have not arisen but that, based on facts known to the corporation, are likely to arise or to become known to the corporation within five years after the date of dissolution or such longer period of time as the directors or a court acting under section 1701.89 of the Revised Code may determine, not to exceed ten years after the date of dissolution; (16) Perform all other acts necessary or expedient to the winding up of the affairs of the corporation.

Courts may also look closely at the context of the action taken to determine whether it was in the course of winding up corporate affairs only. In Blough v. Smythe Cramer, 2012 Ohio 2373, the court held that a dissolved corporation had no standing to file a lawsuit on transactions that occurred after the articles of incorporation were cancelled. The court noted that the defunct corporation would only have the capacity to sue if it was related solely to the winding up of corporate affairs. Since the suit was based on transactions that occurred after the articles of incorporation were cancelled, the court held that the lawsuit was not related solely to the winding up of corporate affairs.

Ohio law has provided that an officer that conducts business in the name of a corporation whose articles have been cancelled for failure to pay franchise taxes is personally liable despite not knowing of the cancellation. In Sheehan v. McRedmond, 1998 Ohio App. LEXIS 5311, a corporation’s charter was cancelled due to the non-payment of franchise taxes pursuant to Ohio Revised Code § 5733.20. After the corporation’s articles were canceled, the president signed a promissory note on behalf of the corporation for operating capital. The president of the cancelled corporation claimed he did not know the articles were cancelled when he signed the promissory note. The court eventually held that the president was personally liable for the amount due on the promissory note despite his lack of knowledge of the corporation’s cancellation. The court noted that the corporation lacked capacity to enter into a loan agreement after its articles were cancelled. 

While the advantages of incorporating a business are plain, there are pitfalls as well. The corporate formalities must be strictly adhered to, even upon dissolution of the corporation. The law outlines specific rights and obligations of corporate officers upon dissolution of the corporation. If a corporate office transacts business on behalf of a dissolved corporation, and that business is not merely to wind up corporate affairs, that corporate officer will invariably be held personally liable on those transactions. This is true even if the officer is unaware of the corporate dissolution. Corporate officers must remain diligent in not only assuring the corporation maintains its lawful existence, but to adhere to the specific rights and obligations outlined by statute to avoid being personally liable on corporate activities.