Updated: Jun 18, 2019
There are lots of reasons why people tend to use LLCs and Corporations instead of operating as individuals. One big reason is the need to separate legally from the business dealings. Most people know that an LLC for instance is a separate entity and the owners can be shielded from liability from improper business practices. When a company gets sued, the judgment allows for the seizure of company assets or money, while protecting the owners personal assets(except in certain cases).
Because this is a widely accepted truth, some business owners have taken to a practice of building a series of "shelved" LLC or Corps. This essentially boils down to fraud. Its a way to continue business as usual in the event of a legal mishap.
Let's examine how this is done:
Mr. Smith wants to open a company called J W Smith INC. He is smart enough in the beginning to know he will get into some legal trouble, so at the same time he also files to open the following corporations:
J.W. Smith INC
JW Smith Corp
J.W. Smith Corp
JW Smith Holdings
JW Smith LLC
and so on and so forth...
Mr Smith goes to his bank and opens a business account for J W Smith INC. Now he can accept payments under this name. But more importantly, the bank will accept any check he brings in with the payee being " JW Smith." Banks will accept checks which "appear to be intended for the account holder as the payee." Mr Smith runs up all the bills from his vendors, asking for extensions over and over until his vendors cut him off completely. They are all threatening to sue for past due payments. He immediately closes down the business. Filing to dissolve the Corp. If anyone goes through the motions to collect the money, they will find that business is long gone.
But is Mr. Smith really out of business? No. He has moved on to the next "Shelved" Corp on his list and continues business as usual. Because the names are so similar, he can use the same bank account without any change in his banking agreement, the bank has no clue that this is a totally different company. He can continue to accept checks from his customers and ignore his vendors, Repeating the cycle. Each time leaving behind a shell of a business for the vendors who come looking to get paid.
The key to catching this type of scam is to focus on the person, rather than the business. Looking at all the businesses a person owns can reveal this type of pattern, and may help you to link them all together, making it possible to group them into a judgment to collect for outstanding amounts owed to you.
If your having trouble with business owners and a lack of information, send us an email and we will be glad to discuss it with you.