Can you sue a company that doesn’t exist? Let’s say your company has unknowingly been selling goods to a fake corporate entity called “ABC INC.” From all indications, ABC INC. complies with all aspects of corporate formalities. All purchase orders are issued under ABC INC.’s name at ABC INC.’s corporate address, and all payments are issued from ABC INC.’s corporate account.
Then, one day ABC INC. stops paying and incurs a sizable outstanding balance. When you contact ABC INC. for payment, its owner refuses to pay anything further toward the outstanding balance. You, therefore, decide to file suit against ABC INC. However, when searching for the company name on the New York Department of State’s website, you find that ABC INC. does not exist as a legal entity. How can you collect the amount due?
Suing a Fake Corporate Entity
While you can’t sue a fake company, you can sue the owner of the fake corporate entity. If a person operates an entity but fails to form and register that entity with the Department of State, then the owner is personally responsible for the debts and obligations of the unregistered entity.
Often a person who operates an unregistered entity will be sued as “OWNER NAME doing business (d/b/a) as BUSINESS NAME.” Even if the owner registered the entity name as a “fictitious name” without actually forming a corporation or limited liability company the owner would still be personally responsible for the outstanding debts. The only difference is that no one else would be able to use that fictitious name when operating their business.
The only way the owner could have avoided personal liability for the outstanding balance in this scenario would have been to actually form the corporation or LLC. The owner of the fake business should have registered the entity with the Department of State and completed all required formalities. In the case of limited liability companies, formalities could include publishing notice of the entity’s formation in the county where formed.
Forming the entity after the transactions occurred, however, does not let the owner escape personal liability. If the entity was not incorporated during the period of the transactions, then the owner will be liable since the owner made purchases without the formed entity. Therefore, an owner of an entity that has not yet been formed may be sued for the obligations of the non-existent entity. The only way to avoid personal liability for future transactions is to form the entity with the Department of State and transact under its registered name.
If you have a debt collection matter that you need assistance with, contact Frank, Frank, Goldstein and Nager for a consultation. We have the experience that pays.
