Closing a Business
You may decide to shut down your company in order to retire, in response to financial hardship, or for other reasons. Regardless, closing a business is not as simple as just emptying the office and turning off the lights. In addition to certain state regulatory and taxation procedures, you may also have to meet the requirements of your business articles, notify creditors, collect money owed to the business, and take other important steps. This section includes information about succession planning, a chronology of shutting down, what to do if you're sued after your business closes, and other resources related to closing a business.
Dissolving a Business: Main Steps
Unless you are a sole proprietor, you will need to follow certain procedures when you dissolve your business. If it's a partnership and you don't have a written partnership agreement in place, you will need to notify the other partners (in writing, preferably) of your desire to leave the partnership. But if you have a partnership with a written partnership agreement, a limited liability company (LLC), or corporation, the process can be a little more complicated.
These are the main steps involved in closing down a small business:
- File with State - Most partnerships (limited and general), LLCs, and corporations must file dissolution papers with their respective state (either "certificate of dissolution" or "articles of dissolution")
- 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
- Cancel Business Licenses - File paperwork with licensing agencies in order to cancel permits and licenses (this prevents others from fraudulently using your name)
- Notify Creditors - You must inform creditors, lenders, insurers, suppliers, vendors, service providers, and others of your impending closing; LLCs and corporations also must provide these entities with a mailing address for claims and deadlines to file these claims
- Settle Creditor Claims - Either pay in full or work out a compromise for all valid claims
- 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
- Handling Assets - You will want to sell any outstanding inventory you may have, as well as office equipment or anything else considered an asset
Managing a Struggling Business Prior to Closing
When a business is struggling and nearing its end, managers should take extra care to avoid personal liability. Even officers in LLCs, LLPs, and corporations 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. And before winding down the company, make sure you have a clear picture of your company's financial standing. Other tips for managing a business soon before closing it include the following:
- Keep personal funds and business funds separate
- Do not hide your debts
- Avoid making preferential payments to creditors
- Do not try to sell or transfer assets in order 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
- Consider bankruptcy as early as possible
Closing a business is usually not the ideal outcome, but it happens quite often. Click on a link below to learn more.
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