Closing a Business

You may decide to shut down your small business for any number of reasons. You may want to retire, have financial hardship, or looking for a lifestyle change. There are many steps to closing down a business involving filing paperwork with the Secretary of State, and following state and federal employment and tax laws.

To close a business, small business owners must meet the requirements of their internal documents. This may include getting board of director approval or a membership vote 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 members 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

• Carefully plan 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.

Partnership. 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.

Limited Liability Company or Corporation. Your LLC operating agreement dictates how you wind up your company. If you have a corporation, your bylaws may stipulate the process. If you do not have an operating agreement or bylaws, you follow the state default rules for closing your business. Typically, you must file Articles of Dissolution or a Certificate of Dissolution and a Certificate of Cancellation or Articles of Termination with your state’s Secretary of State. If you operate your business in other states, you must file there as well. Your business must be current on state requirements such as paying state tax and filing annual reports.

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:

Notify Employees and Pay Final Payroll

If your business has more than 100 employees, you must follow the federal regulations of the Worker Adjustment and Retraining Notification Act (WARN) which requires employers to give a 60-day notice of a plant closing or mass layoff. Check your state regulations as well. For example, in California the notification requirement applies to employers with 75 full-time or part-time employees.

Distribute final paychecks according to state laws.

Notify the IRS and Other 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.

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 and Pay Business Debts

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 invoices.

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

There are as many challenges for the small business owner to close a business as open one. It is difficult to do it alone. The Small Business Administration (SBA) provides helpful resources for small business owners. You want to ensure you’ve done everything legally to protect you from liability. Even an honest mistake can result in liability long after the business has closed down.

Nothing can replace the advice of a business and commercial law attorney who can understand your situation, draft dissolution documents, and guide you through the process.