If you’re missing required tax payments or are slipping behind on house or car payments, chances are you will not salvage your business. If you decide that there’s little or no chance of making a profit anytime soon, you may choose to shut down operations, pay off as many debts as possible, and close your business down in an orderly fashion.
Closing down a business takes work. If it’s done properly, you will end all personal liability for your business.
Going out of business can be a difficult situation to approach. Understanding why businesses end can sometimes help prevent the situation from arising. In many cases, a business might end simply because it has no longer become profitable.
However, a company can go out of business due to other problems such as:
- Lack of a proper business plan
- Failing to oversee employees correctly
- Violations of federal, state, or local business laws
- Legal issues such as discrimination or harassment
- Being hit by a lawsuit
- Failed business projects (i.e., failed mergers or failed acquisitions)
Legal Issues to Consider When Going out of Business
It’s not always a simple process when a company goes out of business. There may be many legal issues that need to be handled before the case can be closed. Some of these include:
- Settling debts
- Business succession (i.e., transferring the business to another owner)
- Tax issues
- Distribution of business property
- Maintenance of business records, especially confidential information
Failure to properly close a business can result in legal violations. For instance, leaving tax issues unattended can create liability for the owner and/or employees involved.
Working with professionals, such as accountants and/or lawyers, may be necessary when selling or closing a business. This will help to ensure that you’re following the proper procedures.
How Do I Vote to Close the Business?
If you’ve been operating as a sole proprietorship, you can skip this step entirely.
Suppose you’ve been doing business as a corporation, LLC, or partnership. In that case, you and your business associates must agree to dissolve the business by following either the procedures laid out in your organizational documents or the rules set out in your state’s statutes. These rules typically require at least a majority or two-thirds vote. A unanimous vote to dissolve the company may be required in some cases. Be sure to look over those documents to make sure you conduct the voting correctly. Check your state’s corporation, LLC, and partnership statutes to find out what the regulations are.
Suppose you’ve been doing business as a corporation or LLC. In that case, you’ll need to officially dissolve your business so that you are no longer liable for business taxes or filings within your state. Officially dissolving your business puts creditors on notice that your business cannot incur further business debts.
Your state should have the necessary forms. Contact the Division of the Secretary of State for a certificate of dissolution and a certificate of election to wind up and dissolve. Those forms set out the total of your business’s debts, liabilities, and the distribution of your business’s assets. How you and your co-shareholders decided to dissolve the business will also be included in these documents. LLC’s have to file similar documents called articles of dissolution.
Some states require you to formally dissolve your business before obtaining a tax clearance or consent to dissolution from the state tax board, declaring that all of your business taxes have been paid.
The rules and forms involved with dissolving a business entity are usually posted on your state’s Secretary of State’s website. If you’ve been doing business as a partnership, you may have to file a dissolution form with the state, especially if you filed paperwork with the state when you first formed your partnership.
Should I Liquidate Assets or File for Bankruptcy?
If you’ve run up business debts and have concerns that you’ll never repay them, you may want to consider selling your business’s assets to pay off debts as best as you can and move on. There are three main ways to proceed with this process:
- Sell your assets and negotiate with your creditors to agree on a settlement that releases you from further liability
- Hire a company or law firm that specializes in this process
- File for bankruptcy, let the court sell your assets, and wipe out the remaining debt.
Bankruptcy is a powerful tool. It may wipe out most unsecured debts, such as credit card bills, lawsuit judgments, and debts to suppliers. Bankruptcy may give you a fresh start. However, if one of the other options fits your situation, it will likely be less expensive, time-consuming, and gut-wrenching than bankruptcy. The liquidation option that works best for you will depend on the size of your business, the amount of debt your business has, and the type of business you operate.
If the value of your business assets is nearly enough to pay off your debts, you might be able to sell your assets and settle your debts yourself without bankruptcy. If you have a lot of debts but creditors won’t accept your settlement offers, or if you don’t have enough cash to offer a settlement, bankruptcy is likely your best option.
Business debts become personal debts if your business is organized as a sole proprietorship. In these cases, you can file for Chapter 7 bankruptcy, which will wipe out the majority of your debts, or for Chapter 13 bankruptcy, which allows you to repay your debts over time.
If your business is a corporation or LLC, the decision will depend on whether you are personally liable for any of the business’s debts. Generally, you won’t need to file for personal bankruptcy to escape business debts because you are not personally responsible for them. Therefore, a corporation or an LLC is a separate legal entity and will be liable. If your business can’t repay all of its debts, consider negotiating a settlement with your creditors, assigning your debts to another company, or filing Chapter 7 bankruptcy. Whatever business debts can’t be paid will be erased at the end of the bankruptcy case.
You are personally liable for business debts when you’re in a partnership. In almost all cases, you’ll need to file for Chapter 7 personal bankruptcy to wipe out those debts. You can try to negotiate with your creditors or assign your debts to another company, but those tactics are more complicated when other partners are partially responsible for debts.
Partnerships rarely file for Chapter 7 bankruptcy. Chapter 7 bankruptcy doesn’t rid the partners of their personal liability for any of the business’s debts. Chapter 7 bankruptcy makes it easier for creditors to reach the partners’ personal assets because bankruptcy trustees can sue partners personally to recover the partnership’s debts.
Do I Need a Lawyer for Help with Business Issues?
Going out of business can sometimes be a complex challenge. However, they may be ways to minimize losses and shift some of the impacts through careful review and planning. You may wish to hire a business lawyer if you need help with the process. Your attorney can ensure that no loose ends are left undone and advise you on how to proceed.