Can one company be held liable for the debts of another company if both are owned by the same person?

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Can one company be held liable for the debts of another company if both are owned by the same person?

I am the principle owner of 2 separate LLCs.Both are supplied by the same distributor. Company A is healthy with no debt; Company B is newer and owes money to the distributor. Although we are not considered franchises, we are governed by the rules of the distributor not to be supplied by other suppliers. Company A has recently been “cut off” of supply which will put us out of business because of company B status. Is this legal? Aren’t these companies completely separate?

Asked on March 15, 2014 under Business Law, Wisconsin

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 7 years ago | Contributor

The distributor cannot recover company B's debt from company A--that is, it cannot sue A for the money B owes it. However, a private business, like the distributor, is free to decide who to do business with or not, so long as it does not breach or violate a contract. So if the distributor feels that A is a risk--that it might default on its debt--because of its co-ownership with B, which has defaulted--it can refuse to do business with A.

However, if there is a contract with A, and A has been complying with all its terms, then the distributor can only cut A off if the terms of the contract allow it to do so; you need to review any contracts to see if, under the circumstances, the distributor could cut A off. If cutting A off breaches the contract then you can:

1) Sue the distributor who compensation ("damages") for breach of contract;

2) Sue the distributor seeking a court order (an "injunction") requiring it to comply with the contract and keep selling, etc. to you; and/or

3) The distributor's breach of its contract (cutting A off when it was not allowed to do so under the agreement) would free A from its own obligations and let A seek supplies, etc. from other vendors.


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