A Checklist When Closing a Business
There are many reasons why business owners decide to permanently close their doors. Perhaps the owners launched a company as friends and the relationship has soured over time. Or maybe the owners are ready to retire and have no plans to sell their company, pass it on, or merge with another business.
In many cases, business owners want to get out because they are losing money with the venture.
Whatever the reason, owners should understand there are certain requirements and obligations, depending on the type of entity, the business industry, the location and other factors. Below is a general checklist of steps to take. Consult with your attorney and accountant to guide you through the process and ensure you comply with all applicable laws in your situation.
Take a voteto close the business if you operate as a corporation, LLC or partnership. You need a majority of the shareholders to approve the decision. Follow the guidelines established in your entity’s organizational documents. Record the final decision in a written agreement.
___ Adopt a plan with the Board of Directors to liquidate the business.
___ File dissolution documents. If required, formally dissolve your business by filing dissolution documents with the government. If you fail to do so, you may continue to be liable for taxes and filings.
___ Cancel registrations, state and county permits and business licenses, as well as business names.___ Notify employees and comply with labor laws. Issue final paychecks to employees, according to your state laws. You may also be required you to pay employees for unused leave.
___ You may have to comply with the Worker Adjustment and Retraining Notification Act (WARN), depending on the size of your staff. This law requires employers with 100 or more employees to provide at least 60 calendar days written notice before the closing. (Many states have similar laws requiring businesses with less than 100 employees to comply.)
___ Wrap up final federal, state and local tax obligations and “check the box.” The IRS has its own list of tax tasks that must be completed (see right-hand box). For the tax year in which your business ceases to exist, make sure you check the box on the appropriate federal income tax return that the document is a final return. The box is near the top front page of annual returns for a partnership, corporation, S corporation, limited liability company and trust, as well as Schedule K-1. Many state revenue agencies have additional filings for sales tax.
___ Pay business debts. Notify creditors and lenders and settle outstanding debts. Ask them to send a letter stating that the bills were paid in full. If you cannot pay bills to your suppliers, service providers, landlords, utility companies and others, consult with your attorney about how to proceed. The business may have to file for bankruptcy.
___ Collect outstanding accounts receivable.
___ Cancel business credit cards and insurance policies. Notify your landlord by giving the notice required in the lease.
___ Close business bank accounts.
___ Sell off any remaining inventory and assets. Comply with applicable laws.
___ Maintain required records. A business may be required to maintain certain records even after it is closed.
___ Distribute the net proceeds to the shareholders.
___ Notify creditors, employees, customers and others how to contact you in the future.
As you can see, there are numerous tasks that may have to be completed. What happens if the shareholders can’t all agree about the timing or details of a business closing? Depending on the state, certain shareholders, directors or even the Attorney General can petition for judicial dissolution, based on certain circumstances. Judicial dissolution is a process in which a court makes the decisions about winding up the business. In general, this should be a last-resort option because courts may make decisions contrary to the individual interests of the parties involved. Consult with your attorney for more information in your situation.