Closing a Business - 101

Closing a business is complex but a necessary process.

Reasons behind closing your business-

If your business is no longer generating profit or you are facing problems running it, then closing it may be the right choice to make. But this isn’t so easy as it sounds. There are a lot of reasons of closing a business; some of them are listed below:

-        There is a sudden decrease in demand and the owner is not able to find new clients or markets.

-        Depending on the business's nature, lack of resources like land, labor, raw materials or financial support/investment, etc. has affected its smooth functioning.

-        Competition has increased multiple folds, and the owner is not able to keep up.

-        Uncertainty of the national Economic Growth rate

-        Company is no more making profit or it ran into a debt that is impossible to settle.

 

Things to keep in mind before closing your business-

Every company has to go through various mandatory compliance checks before deciding on finally closing it. There are various legal requirements that you need to comply with to shut down the business. It includes notifying your investors if any, gaining approvals, selling the existing assets and filing taxes, and paying off your creditors.

All in all, closing a business is not something that can happen in a snap of a finger. It is a rather complicated process that involves working with the state authorities and fulfilling the requirements before you could close the business. It also depends upon the structure of the company, be it LLC (limited liability company), corporation, Sole Proprietorship, or others.

The process will vary depending on your business entity. That’s why it is crucial to follow all the required steps to avoid any hassle and complexities arising out of it. It is always advisable to hire professionals like attorneys and accountants. They have expertise in this space to make it happen smoothly. 

 

Steps needed in closing a business-

Let's have a look at step-by-step process of closing a business for better understanding: 

1) Seek approval from all stakeholders - You need to gain consent and approval of your business partners. After this you can move on to the next step.

2) Pay off Debts - Before closing a business, you need to pay off or settle the outstanding debts. You require to send a letter to your creditors or anyone, for that matter, to whom you owe money. That’s a legal obligation that you need to follow as per the process. Some of the key people you need to notify of this decision are insurers, lenders, creditors, vendors, suppliers, and service providers. In some states, you have to publish a newspaper ad to communicate your decision to the public. In case your company's finances are in bad shape, it is always a good idea to discuss your options with lenders/creditors. They may be willing to work out some arrangement. 

3) File Taxes & Meet the deadlines - Depending upon the structure of your company, you need to file appropriate taxes and meet the deadline of filing federal tax returns. You need to report the key steps of closing the business by filling out all the relevant forms.

4) File certificate of dissolution with the secretary of state - One of the mandatory steps of closing a business is filing a legal form called a certificate of dissolution. It dissolves the articles which you filed to form the company. Generally, the particular secretary of the state office governs the whole process. After that, you need to notify the IRS using its liquidation or corporate dissolution form. Some states also require business owners to get a tax clearance document. This substantiates that you have filed your taxes, and your business is free from all sorts of tax liabilities.

5) Comply with Labor Laws (If applicable) - U.S. Department of Labor requires all businesses with over 100 employees to give at least 60 days' notice of their decision of closing the business. Although you may not need your employees’ approval, you still have some obligations to them. Paying their final paychecks according to the state laws is one of them. As we discussed, this may not apply if you are a small business, but it is always worth keeping it in mind and discussing these matters with the debt attorney you hire in case the closing of business is due to overburdened debts.

6) Close your accounts - Notify all the relevant parties such as lenders, suppliers, vendors, and banks to close down all your accounts as you would not need the services anymore. Cancel all the registrations, licences, permits, and everything else that you feel appropriate. 

7) Asset distribution - Now is the time to distribute the assets evenly according to ownership after paying off all the debts and taxes. You should keep some portion to settle any unforeseen request by creditors or anyone else. Once everything is settled, you can distribute the assets based on your shareholding and rights. Don't forget to keep some funds for miscellaneous expenses aside. If you are the sole proprietor, you can keep everything after paying debts and loans since there is no one else to claim. In case you are a corporation, then the cash and assets are divided based upon the number of shares held. For LLC and partnerships, assets are divided based on each partners' capital account. 

Final Word: Now you understand what is needed for closing a business. However, various complexities are arising out of it that you still need to know. You should hire an attorney who has expertise in these matters for seamless and hassle-free closure. Always do your research and homework and reach out to experts for better decision-making. While closing a business may appear to be easy, but it is a rigorous process. Lastly, don’t forget to keep account of records and actions taken in the process in writing. It will give you better control and understand the process well. Keep the documents at least for a few years once you get the closure certificate.