It is recommended that new customer numbers be created whenever there is a change in the legal entity. A change in the legal entity of the business will affect not only who is responsible for payment but also may change the element of risk. A change in legal entity creates a new business. Therefore, a new credit application should always be required of the new business and analysis of credit and risk should be performed.

For example, in a proprietorship there is only one owner. The owner of the business is solely responsible for the debts he or she incurs while operating the business. If Reginald Black is the proprietor of LMN Appliance, Reginald Black personally owes the debt of LMN Appliance. If Reginald sells LMN Appliance to Sherry Bettencourt, unless there is an agreement to the contrary, Reginald is responsible for the debts of LMN Appliance until the date of sale to Sherry.  If the customer number for LMN Appliance is not changed after the sale to Sherry then the debts of Reginald and Sherry become commingled as well as payments and credits. This can prove frustrating later when trying to sort out whether Reginald or Sherry owes or is owed payment and/or credits.

The same is true of partnerships. In a general partnership agreement, all of the general partners are responsible for the debts of the partnership. A general partner who leaves the partnership is generally only responsible for the debts of the partnership incurred prior to their departure. By not creating a new customer number when the ownership of the partnership changes, we allow for confusion to exist when determining what monies are owed by whom.

As discussed in the previous column one corporation acquiring another corporation may or may not acquire the liabilities of the acquired corporation. This is usually determined by the agreement that identifies the acquisition as a purchase, merger or consolidation. If the corporation has not acquired the debts of the other then establishing a new customer number also provides for separating old from new debt.

Every credit policy should contain a statement as to when customer numbers are assigned, inactivated and purged. Inactivated customer numbers should be purged annually and customer numbers should be inactivated whenever one of the following occurs:

• Customer changes legal entity
• Customer sent to collection agency
• Customer files Bankruptcy
• Customer written off to bad debt
• Customer has not purchased within six months

I wish you well  

This information is provided as information only and not legal advice. Legal advice should be obtained from a competent, licensed attorney, in good standing with the state bar association.