There is a right way and a wrong way to close, dissolve or wind down the business. Simply walking away will leave a lot of open doors that need to be closed permanently.
Although it is never pleasant to shut down, sometimes you close a door so that another may open. If the business is not working and it cannot be saved, dissolve it and regroup. Bob Johnson of BET started and closed several businesses before hitting it big and becoming a billionaire. Not bad for regrouping, huh?
The goal of closing a business systematically is to close it quickly in a cost effective manner. So, the big question is: How do we properly close a business?
Dissolve the business structure
Whether you are operating as a corporation, limited liability company (LLC) or partnership, the vote and decision to close should be recorded in the meeting’s minutes. After the vote to dissolve the business structure, the appropriate paperwork should be filed with the Secretary of State’s office where the entity was created. Take extra care to follow the instructions completely in an effort to limit liability for any debts that may accrue after the dissolution of the company.
Pay off debts
If the business has debts, they must be paid prior to distributing any remaining money to shareholders, members or partners.
Close tax accounts
Notify IRS that the business has closed by closing your Employer Identification Number (EIN). File the final federal and state tax return if applicable. Let the taxing agency know that this is the final return. Do not forget to make sure the payroll withholding taxes have been paid to date as well. This will also help to limit any personal liability for those fees.
Cancel the business licenses and/or permits
Reach out to your local county where the original business license or permit was issued and cancel them. The cancellation of the license and permit will eliminate future assessed fees and taxes by notifying the county agencies that the business is no longer operational.
Notify suppliers and service providers
When possible, notify your suppliers that the business is closing. If there are any outstanding bills, make an attempt to pay them, if the money is available. But if the money is not available, this will let them know to stop collection efforts. Also remember that if a personal guarantee was provided for any of the debt or bills, the supplier may still pursue that individual personally even though the business has been dissolved. Additionally once the suppliers are notified of the impending closure, they may deny credit and convert the business to cash payments.
When the suppliers are treated fairly, they will be more willing to work with you in the future with another business. Try not to burn the bridges because the supplier may be needed again.
The service providers would include utility companies, telephone companies, payroll processing companies, insurance companies, etc. Remember that some service providers required deposits and that may be forthcoming to the closing business. Therefore the service provider may need a forwarding address for those deposits.
Notify clients and customers
It is imperative to notify clients and customers, especially if they are dependent on or expecting services or products. If orders cannot be completed or fulfilled, any deposits or unearned revenue should be returned if possible. By notifying them of the business closure, the clients can take the appropriate steps to find a replacement. The client will appreciate the notice and may be willing to do business with you again because of the honorable and respectful way they were treated in spite of the closure.
The earlier that the employees are notified the better off all will be. At the very least, a two-week notice is warranted. Remember that the employees have families that depend on the frequency of the wages coming into the household.
When there is the possibility of disruption, the employees need to know so that they can plan accordingly. There is the risk that employees will leave when they are still needed. But there is no ethical way to avoid notice. Just like with the clients and customers, when the employees are treated with respect, there may be the opportunity to rehire them with the new venture.
Bank accounts/credit cards
Do not forget to close the bank accounts and credit cards in order to eliminate additional fees. But only close the account when all deposits and credits have been received and all payments and checks have cleared.
Read the lease carefully and adhere to the clauses. Give the landlord notice, which is usually 30 days. Be mindful of the terms of the lease and whether there is personal liability for the remaining lease term, if any.
If at all possible, negotiate with the landlord, if there is still time on the lease. The landlord may have a duty to mitigate by looking for a new tenant. However, there is nothing that states that the closing business cannot help find a replacement tenant.
Remember, while this door may be closing today, another may open tomorrow.
(Contact Carlee McCullough, Esq., at 5308 Cottonwood Road, Suite 1A, Memphis, TN 38118, or email her at firstname.lastname@example.org.)