What Is a Bulk Sales Law and How Does It Apply to a Closing Business?
“Bulk sales” laws are intended to prevent business owners from defrauding or evading creditors by transferring all (or a substantial portion) of the assets of the business to another individual or entity. The law is also intended to avert the possibility of businesses selling their assets below fair market value in a “sweetheart sale,” in which the owner of the business manages to maintain a degree of control. For example, the law applies when the business assets are sold to another business that is controlled by the same owner. Virtually all states have adopted the Uniform Commercial Code that gives notice to creditors of bulk transfers of a business’s assets.
Generally, when an existing business incorporates there is no plan to defraud creditors. These companies are simply changing the form of the business, and have every intention of honoring the debts of any previous incarnations. In cases where the corporation receives the assets of the unincorporated business and assumes its debts, the bulk sales law is a mere formality. The corporation is accountable for the debts of the business transferring the assets in proportion to the value of the transferred assets.
