Closing a business can be stressful, and that difficulty will only worsen if you don’t follow the necessary procedures.
Before you can move on, you’ll have legal documents to file, assets to distribute, and salaries to settle. If you leave before completing all of the necessary steps, you risk dealing with legal issues, a damaged reputation, and extra fees.
In this article, we’ll discuss eight business closure steps that will allow you to navigate this difficult process as smoothly as possible. By following these guidelines, you can be confident that your business is wrapped up properly.
Eight steps to closing a business
- Understand your legal rights and obligations
- Gather the necessary documents
- Notify your current employees
- Notify customers, vendors, and partners
- Dispose of any remaining assets
- Finalize financial payments
- File your final taxes
- Close down all digital platforms and accounts
1. Understand your legal rights and obligations
When closing a business, it’s imperative that you understand the legal rights of those you work with as well as your own and that you’re aware of all your obligations as the business owner. Legal responsibilities come into play when a company has shareholders, creditors, or employees.
Suppose your company is a corporation or partnership. In that case, its owners (shareholders, partners, etc.) must all agree to dissolve the company under the procedures outlined in the documentation that initially established the company. Laws and regulations may govern the process for closing or dissolving a business if no written contracts exist or are applicable.
It’s a good idea to seek guidance from business evaluation experts and your lawyer before shutting down your company. You may also consult with bankers, accountants, and the Internal Revenue Service (IRS) for further assistance.
When winding down operations, notify specific stakeholders and agencies and ensure that all loose ends are taken care of. The relevant parties may try to render you personally accountable for any outstanding obligations of the company if you dissolve it without notifying them and paying or resolving their claims.
You will also be obligated to notify employees of the closure of business. However, you can’t do this if the shareholders do not authorize you. Furthermore, the law requires you to pay out all vacation compensation and final paychecks to all employees.
Additionally, you are legally required to notify the IRS that you are closing down your business. You must also close your company’s bank accounts to avoid future fraud, file legal documentation with the state, and keep all business records.
We’ll discuss how to take care of all these matters in the steps below. But, first, as part of your legal rights and obligations, you must create an exit strategy.
Create an exit strategy
An exit strategy is when an entrepreneur intends to sell their ownership of the company to outside investors or another business. Exit strategies allow the business owner to lessen or liquidate their stake in a company. They’ll even be able to make a substantial profit if the company is successful.
All businesses should have an exit strategy in place long before any thought of selling occurs. Otherwise, there may not be time to create a good exit plan, as most business closure strategies take between 90 days and one year to complete.
Your exit strategy is crucial because it will allow you to move quickly if unexpected circumstances necessitate a fast sale. You are at risk of financial loss without a good plan in place.
There are various exit strategies to choose from, including liquidation, merger and acquisition (M&A) deals, initial public offering (IPO), bankruptcy, and more. A beneficial one when closing a business is liquidation.
Liquidation
Liquidation is the fastest and easiest exit strategy in a business plan. It involves paying off all debts, selling the assets, and dissolving the actual business, among other things.
After the business shuts down, your company will cease to exist, and you will have no more ties to it. The liquidation strategy can also help directors to avoid any personal liability. With liquidation, the proceeds from the sale of business assets are used to pay the company’s debts.
But let’s say that you are planning your strategy ahead of time, as it should be done, and not hurrying through an unprepared business closure. Remember that there are two main objectives of an exit strategy:
- Maximizing your company’s value
- Ensuring that you accomplish all business and personal objectives during the exit
Everything in your plan should work together to accomplish these two objectives. Let’s consider several critical points for any successful business exit strategy.
- The sooner, the better: Having an exit strategy in place from the beginning minimizes obstacles when it comes to the crunch.
- Identify objectives: Is your goal financial freedom or leaving a legacy?
- Establish a timeline: Decide on the ideal time at which you’d like to exit, whether at retirement or when your company has reached a particular profit margin.
- Have more than one exit option: Plan for selling the company as well as liquidation or voluntary closure to prepare for any eventuality.
- Review your plan: Update your plan when circumstances or objectives change.
- Have a trusted team of advisors: You’ll need a team consisting of an accountant, a lawyer, a business valuer, and possibly a financial planner to assist you in formulating your exit strategy.
Once your exit strategy is in place, you can have peace of mind knowing you have an organized plan of action.
2. Notify your current employees
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Once the shareholders are on board with the plan, you must give your employees notice about the closing of your business and pay them any outstanding wages and compensation. Transfers of retirement or health savings accounts will also require your attention.
Some employees may cease showing up to work as soon as they find out the business is closing, so the timing of the announcement to your staff is crucial. It’s possible, though, that you’ll need to start laying off workers and retain a core group that can persist through the shutdown. Before permanently shutting down operations, you must ensure you have sufficient funds to pay your staff for any remaining work. In case any legal or tax difficulties relating to former employees arise, make sure to maintain all employee records with the rest of your business records.
3. Notify customers, vendors, and partners
You need to give customers notice that you will soon be shutting down. There are several acceptable ways in which to notify your customers:
- Advise customers in person.
- Send out an email or letter campaign.
- Advise customers through your business’s social media channels.
- Post a notice on your business’s official website.
- Post notification on your shop front.
- Hold a closing sale, which gives you the added benefit of selling off your stock.
Even while closing down shop, you must tend to your pending job duties. Jobs in progress may require refunds if you’re unable to complete them. Or you could get out of your contracts early through negotiation. If you cannot finish a project by the deadline specified in a contract, you may be required to pay a cancellation fee. Paying this fee could be the simplest solution if you have the financial means to do so. If you can’t make this payment, call the consumer, explain your financial circumstances, and ask to be released from the agreement.
Collect outstanding accounts receivable
Before you inform your customers that you are closing, you’ll need to collect as much of your outstanding accounts receivables as possible. Once customers know that the business is about to be closed, many of them won’t bother to pay. However, the threat of handing them over to debt collectors or lawyers for collection is often enough of an incentive to get a bad debt settled.
4. Gather the necessary documents
Company accounts will need to be shut down. Permits, registrations, licenses, and business names are all good examples. Remember that to meet these responsibilities, you may need to submit documentation to other entities besides the Office of the Executive Secretary. By submitting these forms, you can let everyone know that your company has officially shut down. Unknown creditors will also be notified that the company is no longer processing payments for them. Clever con artists will also be unable to use a closed company’s name to commit fraud if the company has been formally dissolved.
File dissolution documents
Dissolution paperwork must be filed. Suppose you fail to file a valid dissolution of a corporation or limited liability company (LLC) with each state in which it’s registered. In that case, you will be responsible for continuously paying taxes and filing reports for that entity.
File tax forms
You’ll need to complete several tax-related forms. For final tax forms relating to your employment, you should submit the following:
- IRS Form 941, Employer’s Quarterly Federal Tax Return
- IRS Form 940, Employer’s Annual Federal Unemployment Tax Return
- Wage reporting and state tax withholding forms
- Final income tax returns
- Final sales tax forms
- Letter to close your IRS business account associated with your employer identification number
Cancel permits, licenses, and your business name
Inform the relevant authorities (state, federal, county, and local) that your business has closed down. Canceling things like permits and licenses you no longer require can help safeguard your funds and reputation. That way, when you stop operating, you won’t have to worry about paying renewal costs or taxes.
Maintain records
You are legally bound to keep certain business records, including records related to the closure of your business, for a specified number of years — even after the business is closed. Varying industries and record types have different requirements for the length of time they need to be kept. Generally, it’s advisable to keep all records for a minimum of seven years.
These records include:
- Financial records, including sales and purchases
- Customer records, including settled debtor account data
- Employee records, including employee payments
Terminate your lease
If your business has a lease, you’ll need to terminate the lease agreement. If your lease agreement has no early termination clause, you may still be liable for rental and other costs until the end of the lease term. A lawyer can provide professional advice if you’re uncertain of the conditions of your lease agreement.
Suppose you reside on the business premises or wish to continue using the same address. In that case, you will need to terminate the lease in the company’s name and enter into a new lease agreement using your or another account holder’s name.
5. Dispose of any remaining assets
Now is the moment to liquidate any excess stock. This will allow you to settle any debts with the money gained from selling assets. You might also begin by offering price reductions on goods.
The remaining stock could be sold at auction or on online marketplaces like Amazon, eBay, or Craigslist. Consult a stock liquidator if your warehouse is overflowing with goods. These businesses will either purchase surplus stock at a discount or assist in moving it through other sales channels.
If a business has several owners and profits or assets remain after liabilities are settled, those proceeds or assets should be distributed among the owners. LLCs will allocate property based on the percentage of ownership each member holds. Companies often split up the assets in proportion to their shareholders’ stakes.
6. Finalize financial payments
Prioritize settling or paying off debts to your suppliers, landlord, utilities, bank, and service providers to limit your exposure to personal liability. As you pay off your debts, request confirmation letters from your creditors.
You must ensure that all the company’s debts, including creditors, have been paid in full before you close the business. Typically, creditors will have a time limit of 120 days from receiving the notice to file a claim.
If you have difficulty settling outstanding debts, you may need the services of an attorney or insolvency practitioner, as all unpaid bills must be paid before your business closes.
7. File your final taxes
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You must inform the IRS of your business’s closure. The IRS may misinterpret your failure to make tax filings if you suddenly stop making them without providing official notification that you have closed the business and may use your prior returns to determine your estimated tax amount and then come after you for payment through means such as a bank account suspension or asset seizure.
It is a requirement to submit payroll tax deposits quarterly and business tax reports annually. As part of the process of winding down, you will need to settle any outstanding tax liabilities, such as payroll or corporate income taxes. Even if the company is no longer operating, you must file the final payroll tax report and tax return on time.
If you are having trouble paying your taxes, you may be able to get a reduction by submitting an Offer in Compromise (IRS Form 656). Negotiating an installment plan for the taxes you owe is also possible.
8. Close all digital platforms and accounts
You will need to cancel your web hosting and domain name if you have one and shut down any social media channels. This also includes closing your business bank account and canceling business credit cards and subscriptions.
Conclusion
Closing your company can be challenging to deal with emotionally. As a business owner, you’ve probably invested a lot of blood, sweat, and tears into your business. Closing it can feel like you’re losing a part of yourself. While our guide won’t remove the sense of loss, it will eliminate any confusion and uncertainty regarding the closing process. This will leave your mind free to focus on new beginnings, like the adventure of retirement or a new commercial venture you may have planned. If you’re going to open another business, remember to formulate a good exit strategy right from the get-go.