Timeline for Closing Down Your Business
One of the grim statistics of starting a business is knowing that almost half of all small business start-ups will no longer exist within five years. According to the Small Business Administration (SBA), the reasons small businesses fail are as numerous as the companies themselves. When a company shuts down, it can't simply close the doors one last time and send everyone home. It may take many months or even years to close a business.
This timeline for dissolving or "winding down" a business gives business owners some idea of what to expect if their business isn't successful. No one wants to plan for failure, but business owners should prepare for the worst as they work for success.
The Dissolution Process
The process of closing a business mirrors the process of opening one. Like starting a business, ending your business begins by ensuring everyone is on board with the dissolution of the business. If your company has articles of organization, they should include a process for voting on dissolution. You may need to call a board of directors meeting or make an announcement to shareholders.
The rest of the dissolution process will take time. The actual amount of time depends on your type of business and the reason(s) for dissolution, but you can expect it to last at least several months. Having a business checklist can make the process easier.
Notification of Employees
The Federal Worker Adjustment and Retraining Notification (WARN) Act requires eligible employers to notify employees at least sixty days before mass layoffs or plant closings. The WARN Act does not apply to most small businesses. Many states, such as California, have their own versions of the Act, which may be more restrictive than the federal act.
All states have requirements on when employees must receive their final paycheck following a business closure. In some states, it is the day of notification. Time your closing and notification so you can make payroll and meet all other financial obligations as well.
Notification of Creditors and Vendors
Cancel contracts and leases according to their terms. For instance, if you have a lease on your building that requires you to give 60 days' notice, you must give the landlord 60 days or risk losing any deposit plus paying costs for breaking the lease.
Contracts for goods or services should have cancellation clauses. They may also have liquidated damages clauses for breach or early termination. As with notifying your employees, give yourself plenty of lead time to cancel any contracts before officially closing your business.
Pay Final Federal Taxes
The IRS has tax forms for the final year of a business. Limited liability companies and corporations have their own forms for the final year. Employers need to file their final payroll taxes and make final tax deposits. After paying all taxes and closing all other business accounts, you must cancel your employer identification number (EIN). You can't do this until filing your final tax return with the IRS.
File Articles of Dissolution
If you filed articles of incorporation to start your business, you must file articles of dissolution to end it. File these documents at the Secretary of State's office within one year of your final tax returns.
Cancel Business Licenses
Cancel all business licenses and permits under your business name. Terminating business licenses and agreements helps keep you in good standing with other companies if you decide to establish a new business. Canceling permits and licenses can be time-consuming, depending on the nature of the license. You may need a certificate of dissolution for city or state permits.
Resolve All Financial Obligations
Notify lenders and other business entities you do business with and arrange continued payment of outstanding loans. If you know your remaining assets will not cover your business debts, you may want to negotiate payment or forgiveness during your winding-up. As with canceling your business licenses, this procedure may take longer than shutting down the business itself.
After the Business Closing
As you can see, closing a business is like juggling. None of these steps are complete until the others are. Although your dissolution is done once you file the final taxes and articles of dissolution, you still need to keep some things open and active.
- The business bank account should stay open until all financial transactions are complete. Keep this account open until you pay all your taxes. Don't forget any electronic transfers, employee paychecks, and outstanding bills.
- Keep all business records for seven years. The Internal Revenue Service wants you to keep employment tax records for four years. Keep property tax records according to your state's statute of limitations laws. Most financial experts recommend seven years as a safe period of time for business records.
Frequently Asked Questions About Closing a Business
Does my partnership have to do all this to shut down? What about a sole proprietorship?
Any company registered with the Secretary of State needs to file dissolution documents. A sole proprietor registered as a limited partnership or professional limited liability company (PLLC) needs to carry out this process.
What happens if I don't do all this?
If your business doesn't officially dissolve, you will still be liable for state taxes, requirements such as annual reports and filing fees, and other requirements under state law. The state may shut down your company if you are not doing business. You can also face fines and legal action, in addition to catching the interest of the IRS.
What's the difference between dissolution and liquidation?
A liquidation or administrative dissolution occurs when the court takes over a failing business while it still has assets. The court may order a liquidation during bankruptcy proceedings. A "liquidator" sells off remaining business assets to pay creditors and business debts.
What is the difference between liquidation and reorganization?
In a reorganization, the business owner remains in control of the business under certain terms and conditions and attempts to pay off creditors under a new operating agreement. Creditors may agree to the new arrangement if they have a better chance of payment than under a liquidation.
Talk to a Lawyer Before Dissolving Your Business
Shutting down a company is an extremely difficult process, loaded with many potential pitfalls. When navigating a business dissolution, it makes sense to meet with a business lawyer. They will know what to expect and can guide you through the process. Finding a business and commercial law attorney can help you prepare for what comes next.
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.
Contact a qualified business attorney to help you tie up all loose ends when closing your business.