One of the most daunting aspects of doing business as an entrepreneur is coming to the realization that your business is failing and needing to decide whether to salvage or close it for good. Business owners must often review their operations to determine how sustainable the business is. When the business is no longer profitable due to a poor economic situation, strong competition or other factors, it is essential that a business owner knows how to close a business the right way.
The dissolution of a business involves a step-by-step process. Knowing how to close a company will save you from any potential lawsuit, loss of business and personal reputations, and excessive charges. Whether it is an LLC or a corporation or a sole proprietorship, this checklist will guide you all the way through the dissolution of your business.
How to Close a Corporation or LLC
Step 1: Think and decide.
Before arriving at the decision to close your company, it is essential to assess the debt obligations and financial strengths of your business.
Review your current situation. Is there any expenditure that you can eliminate to improve your company’s profitability? Check if there is anything you can do to negotiate the lease, reduce the payroll costs or perhaps lower overhead expenses by finding more cost-friendly vendors. By reducing expenditures, you will also have the opportunity to stay in business or even make your business more salable.
Seek expert advice or do research on the internet. Before finalizing your decision to close your business, speak with an attorney, an accountant or other business advisor. Let your accountant review all financial aspects of your company and the possibility of preventing business failure. If closing your business is the last recourse, an attorney can guide you in complying with all legal requirements.
Step 2: Review all documents.
Whether you are a corporation, an LLC or a sole proprietor, you need to review all documents relevant to your business, including articles of organization, bylaws, and other agreements to determine your next step.
LLCs likely require a member’s approval for dissolution according to the operating agreement. Typically, if the majority supports the decision to close the business, then everyone can push through with the process including settling all accounts, paying all employees and filing the necessary paperwork. It is crucial to know the state laws of the state in which your business is incorporated or registered.
Corporations may also need the votes of its shareholders to dissolve the business. The business documents of a corporation will determine the procedures required for closure.
Finally, once you are sure about closing your business, start contacting your creditors and notify them of your plan. This enables your creditors to compute all outstanding debts. Before selling your company’s assets, discuss your liquidation plans with your creditor and talk about how you want to settle your debts.
Step 3: LLC or Corporation Action
Whether it is a limited liability company (LLC) or a corporation, company owners should approve the business dissolution. With a corporation, the shareholders should accept the decision. If you are wondering how to dissolve an LLC, it is important to have the approval of the members. For small businesses, members or shareholders typically take part in the daily operations and usually are aware of what takes place every day.
The corporation’s bylaws and the operating agreement of LLC outline the needed approvals and the dissolution process. Complying with formalities means that the board of directors should create a draft and render approval of the resolution to dissolve. Following this, the shareholders vote on the resolution approved by the director. These actions are documented and kept in the company record book.
Step 4 File dissolution documents.
After the members or shareholders vote for the dissolution, documents should be filed with the state where the business was registered or incorporated. The dissolution of a company starts with the filing of Certificate of Dissolution, also referred to as the Articles of Dissolution, depending on the state.
Some states require the filing of documents before letting the creditors know or before resolving claims. Other states require your company’s tax clearance before filing the Articles of Dissolution. In this case, the company or LLC has to pay the back taxes first.
Step 5: Cancel licenses, permits, and registrations associated to the business and settle your employees’ wages.
Is your business leasing a space? If so, then you will need to notify your landlord of the termination of your lease. Your landlord may require you to either pay the whole amount of the lease or he or she will find a replacement for your space. This is known as mitigating damages. You would be accountable for the leasing fee from the time your contract is terminated until the time a new tenant leases your space. There are times when landlords allow the payment of termination fee, particularly when the location is on high demand.
Settle what you owe to your employees, including any unused vacation leave and wages. Issue a final paycheck to your employees within a specific period. The US Department of Labor offers links to certain state agencies for you to determine whether your state requires you to pay the unused vacation time of your employees. Depending on how big or small your business is, you will be required to notify employees before closing down the business for good.
Part of closing down your company is filing the payroll taxes. Submit your employees’ withheld taxes to the federal and state government within the allotted time. If you fail to comply with these tax requirements, you may be subject to pay a penalty fee and the government has the power to seize your assets to collect the amount owed.
File all the required federal and state tax information. Consult the checklist that the IRS uses for closing a business to make sure that you meet all tax obligations. Talk to your accountant and determine which taxes to pay.
Step 6: Collect the money owed to your business.
Once you have chosen to close your business, collect the money owed to your company so that you can pay off creditors. Consider calling the debtors to politely request the remittance of their payment. Offer a discount as an incentive for the debtor to settle what they owe to your business immediately.
Attempt to collect debts before announcing your business closure. A debtor may attempt to hold out on settling the debt if he or she has the idea that the business is closing. If you have accounts receivable, sell them to a company that purchases account receivables. Such companies will purchase your debt at a lower value and pursue the collection of the debts aggressively for their own profit. Although you will not obtain the full amount of your account receivables, you no longer need to collect any debt and will obtain access to funds quickly.
If you have any outstanding orders, fulfill them. If you are under contract to offer certain products or services, fulfill them or negotiate. It is essential to discuss matters with your clients concerning their outstanding orders and resolve such matters. If you fail to reach an agreement or compromise, you can be held accountable for breach of contract.
If you have assets or business inventory, sell them. It is important to perform a complete inventory of your assets and start selling them. Offer discounts when necessary to move the products at a greater pace. Consider selling your assets at auction. Holding an auction enables you to sell the inventory quickly without added shipping costs. You may also consider selling them to a consignment store. These types of businesses accept goods and sell them. After selling the good, they will give you part of the sale. Consider selling your smaller assets online. Large items will have higher shipping costs.
Step 7: Settling the claims of creditors.
Creditor claims can either be rejected or accepted by your business. Accepted claims should be settled through payment unless satisfactory arrangements are made with creditors for reimbursement. For instance, a creditor may consent to resolve the claim for 80% of the original amount. With rejected claims creditors should be informed in writing that your business rejects their claims. In this case, the assistance of an attorney is needed.
Step 8: Distribution of remaining assets
After paying off the claims, whatever remains of your assets should be distributed to all business owners in proportion to the ownership share. For instance, if 80% of the business belong to you and your partner has the 20% share, you obtain 80% of whatever remains of the assets. Distributions should be reported to the IRS. If the business has various stock classes, corporate bylaws generally summarize the procedure for distribution of assets to these shareholders.
How to Close a Sole Proprietorship Business
A sole proprietorship is a business owned by only one person and without partners. This means that the owner is legally accountable for all decisions concerning the operation or termination of a business. To close a sole proprietorship, below are the step-by-step processes.
Step 1: Inform all employees.
If your business has employees, inform them of your plan to close the business. A company that has roughly 100 employees has the responsibility to give its employees a 60-day written notice before the closing.
Step 2: Notify your clients and vendors.
Send notifications to your clients and vendors of your plan to close your business. Arrange project completion, payment for invoices and fulfillment of any outstanding contracts. Notify them of the final date of business, the final date of services and provide them with copies of any agreements.
Step 3: Cancel all licenses and sales tax identification number.
When closing your company, you should also cancel your sales tax identification number and any business licenses. Do this through the business licensing department of the state where your business is located.
Step 4: Tax work.
File the final tax paperwork. The complexity of filing relies on the scope and size of your sole proprietorship. Report all income including losses and capital gains.