Closing a Business
You may decide to shut down your small business for any number of reasons. You may be wanting to retire, or are facing financial hardship, or maybe you're looking for a lifestyle change.
Regardless, closing a business is not as simple as emptying the office and turning off the lights. Business owners must meet certain requirements. These requirements come from the secretary of state, state regulations, and federal and state tax procedures.
Small business owners also must meet the requirements of their internal documents. This includes getting board of director approval and making sure there is an internal paper trail. Then, there is the issue of paying off business debts, notifying business creditors, collecting money owed to the business, and finalizing the business closure.
This section includes a shutting down chronology and other resources related to closing a business.
Managing a Struggling Business Before Closing
When a business is struggling and nearing its end, managers should take extra care to avoid personal liability. Even officers in limited liability companies or partnerships may face personal liability if they are careless.
As with most things related to debts and financial obligations, it's important that you pay your taxes first. Before winding down the company, make sure you have a clear picture of your company's financial standing.
Other tips for managing a business just before closing include the following:
- Keep personal funds and business funds separate
- Do not hide your outstanding debts
- Avoid making preferential payments to creditors
- Do not try to sell or transfer assets to avoid having them seized
- Consider your insurance needs as the company winds down
- Make sure you still have access to your bank account
- Set a list of priorities for the repayment of debts
- Collect on accounts receivable
- Consider bankruptcy as early as possible
- Consider employee layoffs (before firing any employee, check with your state law to determine if you need to provide the state prior notice before doing so)
- Issue final paychecks to your workers
- Post on social media about your closure
Dissolving a Business Based on Your Business Structure
Your type of business entity determines the process for closing. Unless you are a sole proprietor, you will need to follow certain procedures when you dissolve your business.
If the business is a partnership and you don't have a written partnership agreement, you must notify the other partners in writing of your desire to leave.
If you have a partnership with a written partnership agreement, you need to follow the steps in the agreement.
If you're a limited liability company (LLC) or corporation, the process can be more complicated. Your operating agreement (LLC) and bylaws (corporation) determine your process. If you don't have one, then you follow state tax law and state business laws.
There are a few steps that any business will need to take before closing, regardless of its structure. We discuss the main steps to closing your business below.
Main Steps to Close a Small Business
These are the main steps involved in closing down a small business:
File With State
File a certificate of dissolution or file articles of dissolution with your state secretary of state office. You will need to do this in every state you operate in. You may also need to file an annual report if you're still in business at that time but plan on closing later.
Notify Tax Agencies
In addition to the payment of any prior-year and current-year taxes (including paycheck deductions), you may need to fill out some final tax forms with the IRS and your local tax board. You will need to pay your employment tax and sales tax and file your tax returns, as well.
Cancel Business Licenses
File paperwork with licensing agencies in order to cancel permits and licenses. This prevents others from fraudulently using your name.
You must inform creditors, credit card companies, lenders, insurers, suppliers, vendors, service providers, and others of your impending closing. LLCs and corporations must also provide these entities with a mailing address for claims and a deadline to file these claims.
Notify Financial Institutions
You should let your bank know when you close. You don't want someone to hack into your business bank account, use your business name, or steal your employer identification number.
Settle Creditor Claims
Either pay in full or work out a compromise for all valid claims. Pay secured creditors first.
Collect Money Owed
In addition to paying and settling debts, a business in the process of shutting down will also want to collect on its outstanding bills.
Handle Business Assets
You will want to sell any outstanding inventory you may have, as well as office equipment or anything else considered an asset. This is why you commonly see liquidation sales when a business closes.
Seek Legal Advice When Closing Your Business
Closing a business is usually not an ideal outcome for a small business owner. Unfortunately, it happens quite often. The Small Business Administration (SBA) provides helpful resources for small business owners, but nothing can replace the advice of a business attorney who knows your situation.
You Don’t Have To Solve This on Your Own – Get a Lawyer’s Help
Meeting with a lawyer can help you understand your options and how to best protect your rights. Visit our attorney directory to find a lawyer near you who can help.