As a business owner, there are many reasons you may decide to close your business. You may be preparing to retire or planning a new and exciting business venture. Maybe you’re just lucky and you’ve hit the Mega Millions numbers. Alternatively, you could have been negatively affected by mandated stay-at-home orders or low customer demand due to the COVID-19 pandemic. Whatever the reason, there are several steps you should take to protect yourself.
Reach Consensus With Your Business Partners
First, you will need to reach consensus with your business partners on how and when to dissolve. Obviously, if you’re the only owner, no further agreement is needed. But if you have a partnership, limited liability company or corporation, you need to come to an agreement with your business partners. It is essential that your agreement to dissolve is in writing and that it does not violate your articles of incorporation, bylaws, or other organizational documents. If you cannot reach a consensus with your business partners, you should seek experienced counsel to explore your options.
Seek Experienced Counsel
Second, you should consider seeking experienced counsel to help you navigate the dissolution process. There are many aspects to operating and maintaining a business which must be dealt with to shut down said business, and each one must be identified, addressed and resolved.
To protect your finances and reputation, you may have to cancel permits, licenses, registrations and business names. You may also have to file legal and tax documents with courts, creditors, and government authorities. For example, failure to dissolve your Limited Liability Company or corporation may expose you to continued taxes, penalties, and filing requirements. An experienced business attorney can help you figure out the specifics for your business.
An experienced lawyer will likely advise you to give your employees, creditors and customers/clients clear notice of your closure. You may want to carefully consider collecting all outstanding accounts receivable from your clients/customers before you notify them that you’re going out of business. You may also have further contractual obligations to your customers/clients and may have to return any deposits or payments for goods and/or services not rendered.
Similarly, you should consult with your attorney about the best way to notify your creditors of your dissolution, which can limit the amount of time a creditor can ask for a debt. If you are able to pay some or all of your debts, you may want to prioritize these debts in order to protect your personal liability.
For example, money owed to your landlord, bank or utility companies should take precedence over smaller debts. It also might not hurt to ask your creditors to accept less than the full amount owed in return for a prompt payment from you. Always make sure to get it in writing that your bills are paid in full when you pay your creditors. If you have a heavy debt load and are unable to settle your debts, you should speak with an experienced bankruptcy attorney to guide you through that process.
Prepare to Comply With All Laws
Third, you should prepare to comply with all local, state and federal laws requiring you to pay employees for any work performed through the closing date, plus any unused vacation, sick or personal time as required by your employment contract or by state regulations. Keep in mind that if you are a company with 100 or more employees, federal law will also require you to give employees at least 60 days’ advance notice of your closure according to the Worker Adjustment and Retraining Notification Act (WARN).
Resolve All Financial Obligations
Fourth, you will need to resolve all of your financial obligations before dissolution. To address your business taxes, you or your accountant will check the box indicating that your income tax return is a “final” return. Many state revenue agencies will require filings for sales taxes as well. You must also satisfy your payroll tax responsibilities for any employees or you put yourself at risk of personal liability.
This will probably require you to inform your federal and state tax agencies that you are dissolving and that you will no longer file unemployment returns or an employer’s quarterly tax form. If you are business owner that has requested an Employer Identification Number (EIN) from the Internal Revenue Service (IRS), you should notify the IRS that you wish to close the EIN account.
After you notify your creditors of your impending closure, you will need to arrange to settle all of your open accounts. This could also include terminating your commercial lease, and you should give your landlord the notice required by your lease agreement.
You may also need to sell off inventory or liquidate your business assets, depending on the type of business you have. Many businesses have a “going out of business” sale, which may or may not be right for you. Alternately, you may be eligible for a tax deduction if you donate your inventory to charity. Your assets could include anything from office furniture or specialized furniture like a salon or pedicure chair, to appliances, computers and printers.
An experienced business attorney may advise you to speak with an accountant or tax expert on the tax consequences of selling assets as well as the best way to take advantage of your losses for tax purposes.
Maintain Business Records
Fifth, you need to ensure that you maintain your business records as mandated by federal and state law. For example, the IRS currently requires a business to maintain income tax records for three years if you file a claim for credit or seven years if you file a claim for a loss, though there are notable exceptions.
And, according to the U.S. Equal Employment Opportunity Committee (EEOC), employers are required to keep all employment and personnel records for at least one year and all payroll records must be kept for at least three years.
Certain professions also have regulatory bodies that may have specific guidelines for record maintenance. For example, lawyers in North Carolina are required by the North Carolina State Bar to maintain client files for at least six years after the end of the representation. Always make sure to check both federal and state law before you destroy your business records.
For every step of the process, having experienced counsel on your side can help you maximize your profits and minimize the loss and liability associated with dissolving your business. Even if you are ending your business on a happy note, failing to thoroughly and properly dissolve can open you up to years of frustration.
You could even end up facing litigation from former employees or partners, or facing action from the IRS or other government agencies. The attorneys at Hopler, Wilms, & Hanna would be happy to help guide you through the process of dissolving your business and moving on to your next great adventure.