There are a lot of different reasons for deciding to close a business. No longer having the money, time, or interest to maintain the business are common motivations. A new partnership, job offer, or a change in career focus can also mean you need to figure out how to close up shop. This article provides a practical guide for shutting down your business without getting overwhelmed.
State of the Union
Download this handy worksheet to help guide you through the process.
The first thing you should do if you’re planning on closing your company is pull out the company’s Operating Agreement or bylaws. These documents typically provide general instructions for closing—or as attorneys sometimes call it, “winding up”—the business. The instructions provide guidance about the order in which bills must be paid and how any remaining money should be divided if you have co-owners or investors. Understanding what your financial obligations are as you close the business will make it easier to make decisions and plan.
Once you’ve familiarized yourself with your Operating Agreement or bylaws, it’s time to turn to the experts. An attorney will be able to tell you exactly what state and local requirements apply to your situation, while a CPA can be a huge help in reducing any tax burden associated with shutting down the company. Even an hour of these professionals’ time could save you days of frustration and confusion. If you can’t consult with an attorney, call a local law school or your state’s Bar Association (the lawyer kind, not the boozy kind) and ask if they offer a small business legal clinic or other services for small businesses.
The requirements for closing a business vary from state to state, but there are three main types of filings you’ll need to make with the following offices:
- Secretary of State’s office to terminate the company
- State labor or employment department if you have employees or have been paying yourself a salary
- IRS and your state’s taxing authority for tax-related filings
Exactly what you have to file and the notice you have to provide to others will depend on the particulars of your company.
If your business isn’t very complicated—one owner, no employees, very little or no debt—it may make sense to let it dissolve naturally. That means instead of filing to terminate the company, you just don’t renew it. The risk with this approach is that you remain responsible for the business, even if it isn’t active, until it expires. You’ll still need to submit filings with the IRS, but you may be able to avoid state and local filing fees for cancelling your business mid-term. Consult with a professional to determine if this approach is right for you.
You Can’t Take it With You
Everything the company owns or is responsible for will need to be sold, settled, or transferred. Money raised from selling merchandise and assets will need to be used to pay off debts first, and the owners second.
Many states have rules about holding a “going out-of-business” sale. The rules are largely meant to discourage deceptive practices, like sales that last for years. Some states have exacting notice and reporting requirements. You should be able to locate your state’s rules using your Secretary of State’s website or information line. Good rules of thumb: set an end date for the sale, be excessively clear about return and exchange policies, and, if you’re selling online, check your sales platform’s policies about end-of-business sales.
You’ll want to collect all of your current contracts and review the termination provisions of each, paying particular attention to those agreements that automatically renew. Whenever possible, terminate a contract according to its terms. For contracts that you’re in the midst of and that can’t be easily terminated, contact the other party and explain the business is closing. Most will understand and work with you to end the contract.
For agreements where you’re promised a royalty or payment over time, talk to the other party about transferring the payment, or if necessary the entire contract, to your name or another company you own.
Equipment & Tools
If your company bought equipment and tools that you plan on continuing to use, you’ll need to transfer ownership of those items from the company to you. Just know that doing so will reduce the amount of profits you’re entitled to if you have a co-owner.
This may be more difficult if your company is heavily in debt. Most Operating Agreements and bylaws require a company to pay off its debts first, and, if necessary, to sell its assets to raise the cash to do so. If that’s your situation, you’ll need to pay the company the fair market value of the items you want to ensure the company has cash to pay its bills.
All’s Well That Ends Well
Closing a business can be stressful, but it doesn’t have to be overwhelming. Once you understand what rules apply to your business, it’s a process of ending agreements, selling off merchandise, and paying bills. There is a worksheet on the next page to help you keep all of these tasks in order. With a little order and planning, you can close your current business and move on to your next adventure.
When Closing Isn’t Closing
If you’re closing your business because you’re transferring your work from one company to another, you’ll want to approach closing your current business a bit differently. Instead of ending your relationships with creditors, vendors, customers, and clients you may want to transfer them to the new company. In your contracts with these parties there should be a section, usually toward the end of the document, called “Assignment.” This will tell you if you can transfer responsibility for the contract from your closing company to your new one just by giving the other party a heads up, or if you’ll need to negotiate with the other party to make the transfer.