Starting a New Business After an MCA Default: Eight Decisions That Keep the Old Debt From Following You

The new entity is three days old and already owes explanations.

Every asset in its account came from somewhere, and the old funder will ask where. A formation certificate records the entity; it does not settle the old MCA, release a guarantee, or establish that every asset introduced into the venture is free of claims, so the decisions made during the transition deserve more attention than the name on the new account.

What the Old File Still Says

Place the old agreement beside any guarantee, any settlement, and whatever judgment the docket shows, and determine which entities and individuals appear in each document. A closed location and an inactive company are operational facts, not evidence that a named party has received a release. You close one door and open another and the debt walks through with you. I reviewed one such file on a Friday in August, with the old statements still warm from the printer, and the guarantees were exactly where the owner had forgotten them.

The old business closed its doors. Its obligations kept regular hours. The opening review should distinguish the asserted balance from the amount the owner agrees is due, recording disputes about payments, fees, or reconciliation, since counsel needs the original file complete before advising on the next stage.

Settlement Before the First Transfer

A settlement assessment with Delancey Street can begin while the proposed venture remains a plan. The company provides MCA settlement services; independent counsel evaluates legal exposure and represents the appropriate parties in proceedings. An early proposal can identify which obligations need a release and whether the creditor will consent to a particular disposition of collateral.

Ask the provider to ensure that the payment schedule reflects funds the owner can provide without assuming income the new operation has not earned. Counsel should ensure that the completed agreement addresses the guarantee, the collateral, and any litigation relevant to the transaction. A promise to accept an amount does not explain those details unless the document supplies them.

Tracing Every Asset Into the Venture

New York UCC 9-315, with stated exceptions, continues a security interest in collateral after disposition unless the secured party authorized a disposition free of the interest, and it addresses identifiable proceeds. A machine moved across the street can therefore carry a dispute that a new company name does not resolve. Rarely has an opening balance sheet been assembled with more optimism and less paper.

Equipment From the Old Enterprise

For equipment bought from the old enterprise, retain the valuation, the purchase agreement, and the payment record, and have counsel examine the security documents and any required consent. The transaction should explain who received the price and where the price went after receipt. A bargain price can be commercially understandable when equipment is damaged or obsolete, but that explanation needs support available at the time.

Receivables and Customer Work

Distinguish existing invoices from work contracted for and performed by the new business. Keep the customer agreement, the performance dates, and any assignment the file contains. The question is particularly important when a customer pays a deposit to one company and receives performance from another; obtain advice before treating the deposit as startup capital.

Property supplied by a relative or investor needs the same clarity. Negotiate and document whether it is a loan, a capital contribution, or property the venture uses under permission that confers no ownership, since the investor called it a loan and the books must agree. The venture, in other words, begins clean only if every asset arrives with papers.

The Transfer Rules That Follow the Assets

Washington RCW 19.40.041 addresses transfers with actual intent to hinder, delay, or defraud creditors and transfers for less than reasonably equivalent value under specified financial conditions (the section is a state example, and counsel must identify the governing provisions). Gratuitous transfers that stock a new venture are the first transactions these tests examine. Resist the urge to move property first and ask for advice once the new doors open.

But no checklist of formalities answers the successor question. Successor liability and related theories require their own legal analysis, and a threadbare capitalization funded with disputed assets will draw the attention the formalities were meant to deflect. There are structures that help, though the facts matter more than the form. Debts the venture assumes, or refuses, in its opening documents will shape the claims asserted against it, so the records should show the business purpose and value exchanged.

Payroll Taxes in the Opening Budget

The IRS explanation of the trust fund recovery penalty identifies potential liability for responsible persons who willfully fail to collect or pay trust fund taxes (the page describes responsibility through independent judgment over the financial affairs of the enterprise). An ownership title alone does not supply the complete test, and the business need not have stopped operating for the penalty to be assessed.

The opening forecast should include payment dates rather than a single monthly estimate. Whether the new venture can support both its tax deposits and a settlement schedule is a question the forecast, not this article, must answer. Using available funds to pay other creditors in order to satisfy the MCA balance first, when the business cannot pay its employment taxes, indicates willfulness under the page’s own terms. Have the accountant distinguish taxes collected or withheld from funds available for other payments, and keep the payroll deposit schedule current from the first pay period.

Books, Applications, and the First Year

Most founders want the new company to feel like a fresh start, and I have stopped promising that feeling. Maintain separate books from the first transaction, and give reimbursements between the owner and the business an explanation in the records. Simply record each transfer as it happens, since reconstruction after the fact is extremely difficult and extremely expensive to defend. Any commingling of the two operations, even briefly, should be documented with its date and reason. Separate bookkeeping does not validate an improper transfer; it makes the new operation intelligible.

Read financing, insurance, and licensing applications, and read the lease as well, for the questions printed on the page. Do not assume a new entity permits the omission of a fact about an owner. A new entity with old equipment and old customers is a new name on an old dispute until the papers prove otherwise. Counsel will confirm the obligors, clear the collateral questions, and draft the transfer papers so the venture opens with records instead of assumptions, and that is what the opening balance sheet is for.