Imagine running a successful business for years. Then you wake up with a feeling that you’re ready to walk away. This thought is more common than you might think. Throughout my career, I have spoken to many business owners who imagine often walking away from their company to start another or stop working all together. Reasons for wanting to walk away include burn out, lack of passion for the business, lack of money, or they don’t get along with the other business partners anymore. During these conversations, common questions from clients on the process include:
What happens to my business assets when I close?
What is my financial responsibility?
What if my company gets sued after it's closed or sold? Am I responsible?
Can I (or the business) sue my business partners for the company’s failure?
What documents do I need to close the business?
Planning your exit strategy is important. Whether you decide to sell the business or close it down, you might need to seek advice from several professionals including your lawyer, accountants, and bankers. Sound planning with your lawyer and other professionals can help you transition your business, resolve financial obligations, and protect your assets.
If you decide to shut the business down, here are some things to consider:
1. Review your business’s governing documents.
Documents such as the operating agreement, bylaws, or shareholder agreement will help you determine how to transfer or dissolve the business. The process will be different depending on the type of business.
If you’re the only business owner, it's simple. However, if there are any co-owners, there’s a good chance several parties must agree to close the business. The agreement or approval to dissolve the company should be memorialized in writing, signed by all necessary parties, and kept with your business records.
2. Protect your finances.
Check with the Secretary of State for guidance on filing dissolution documents. Some states require you to get approval from the state tax authority before a business can be closed. Please note this information varies per state. Until dissolution documents are filed in the state(s) where your business is registered, you will be responsible for any and all taxes and requirements - both state and federal – and third parties can file claims against the company. Once the documents are filed, you should cancel your EIN and close your IRS business account.
3. Protect your brand and reputation.
Review registrations or permits that you no longer need and cancel them accordingly. You don’t want to continue paying for unnecessary business items. More importantly, you don’t want your business name, including your trademark name, attached to businesses that are closed and/or projects that you are no longer a part of.
4. Distribute assets according to the governing documents.
If there‘s nothing in the documents, the business should distribute any remaining assets following state law.
5. Provide timely communications to stakeholders.
Communicate change to your employees. How and when you communicate changes to your employees depends on your state. Be sure to review and comply with local employment and labor laws.
Communicate changes to clients. As soon as you’re able to share next steps, notify your clients of the significant changes. This communication should include any steps they need to take, if any, to prepare for the change.
6. Maintain records.
Common practice is keeping records from three to seven years. For example, per the IRS, businesses are expected to maintain employee tax records for at least four years.
In most states, there is little to no cost to file for a certificate of dissolution. The only major cost is if you don’t file the necessary paperwork at all. It’s never a bad idea to consult with a professional. Having a good business lawyer on your team can help you stay on track with agreements and services contracts to make sure your business is closed properly, and your personal assets protected.