Closing down a business is not that easy, whether it is retirement, financial reasons or in cases where you don’t have enough time to manage your business you still need to protect your reputation, credit, and community, especially if one day you will want to venture into the same business again.
Irrespective of whether your business is a sole proprietor, limited liability company (LLC), partnership or a corporation you need to follow the proper guidelines that will help you to shut down your business legally and safely. There are some financial ramifications, personal relationship with employees, suppliers, customers, and tax issues that you have to put into consideration during the process.
Here are the major steps that you should undertake to close down a business legally and also to minimize any risks to assets.
1. Vote to Close Down the Business
For those operating a sole proprietor company, you don’t have to worry about closing it up. For most startups, you just have to consult either your family members or make the decision solely.
If your business is just a general partnership without any written agreement, then you need to give your associate a written legal document to express your desire to withdraw from the organization.
However, if it is a limited liability company (LLC), Corporation or an organization, you have to follow the written rules of dissolutions found on the business partnership agreement, state laws or even articles of association. You and your associates need to agree on a legal way to dissolve the entity. In such cases, the agreements contain certain clauses that oblige a two-thirds or even the majority to give a vote agreeing to end the partnership and wind up.
For most companies, the operating documents are usually archived in the company records and filed with the local secretary of states or registrars of companies. This, therefore, implies that you have to follow the laid down rules carefully and more efficiently to avoid unnecessary disputes years later.
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2. Dissolve Your Business with the Government
Before closing any business, it is paramount that you inform the government and the local state/registrar of companies of the dissolutions. This is to ensure that you are not liable for any filing or taxes after the closure. Officially dissolving the business is one way to put the creditors on notice about its closure and that you can no longer incur any debts.
Your local state secretary of corporation or registrar of companies should have all the necessary legal documents to make the process run smooth. Most of the state agencies ask for documents like “certificate of election to dissolve and wind up” as well as a “certificate of dissolutions.”
These documents usually set out the nature of business liabilities and debts, the division of the assets and how you and your partners agreed on dissolving the company. The LLCs should have the articles of dissolutions.
In some cases, you need to produce the “consent to dissolution” or “tax clearance” to officially get a business dissolvent certificate. These documents are easy to get from your local tax board, and they declare full payment of your taxes.
3. Cancel Permits, Licenses and Business Names
In addition to officially reporting to your federal tax agencies, local state, and the government you need to file an official paperwork with other local organizations for them to terminate all the permits, business names or licenses. When you cancel permits and licenses, you prevent other people from using your business documents. If a stranger gets hold of these documents, you could end up paying unnecessary penalties and taxes incurred by the fraudsters. Similarly, if you have been using a pseudo business name, you ought to file for“abandonment” and have the problem resolved.
4. Pay all Taxes and Debts
You should ensure before the final hammer hits down that all taxes and debts are paid.
Here are taxes you should pay:
Employment taxes: If you have employees you should ensure that you make their final payroll tax deposits. To achieve this, you need to file all the required final pay tax papers, and indicate the correct time to avoid incurring any penalties. Moreover you also need to inform local employment authorities of your business closure.
Assets Sales: When you close down your business, and decide to sell off some of the company assets to help recoup the investments, you need to file a tax file form. This process however may differ from country to country.
Income Taxes: File for final income tax return with your government or your local tax agency.
Sales Taxes: During the process of winding up your business, you need to collect sales taxes and submit the final forms together with the taxes collected from the sales. You can send the duly signed sales taxes forms to the state office responsible for tax collection.
Paying Other Debts
Closing down business usually leads to millions of debts- money owed to banks, landlords, utilities, suppliers and service providers. When this happens, inform creditors and have the plan to clear off all the debts and in full. Always ask for a backup letter that proves you have cleared your debts with the said creditors.
In the last day of your business, pay off your staff their final dues. Your local laws may require you to pay your employee some day before the closure or on that same day when you close the doors. Ensure you also clear any unused and accrued vacation days; in short, follow all the state laws when it comes to paying the employee's their last check.
Consulting tax advisors, attorneys or an accountant is advised so that you meet the required requirements of your state tax agencies and locality.
5. Notify All Employees, Creditors, and Customers
If the reasons for closing down your business are inevitable you need to notify the following companies of trusted people.
Suppliers: Your vendors will need to know when to make their last delivery, the kind of goods you will be returning and when to receive their final payment for all the debts outstanding. In case you still want to continue buying products from your suppliers it is crucial to keep quiet on the impending closure at least for now. Remember that some suppliers may opt out once they know of your impending business closure. This may adversely affect you if they are giving their products on credit.
Service Providers: Those providers who offer services like business insurers, payroll prepares, will require knowing the last day of your business. Also, you need to clarify to them how they will collect their final dues. Check out on how to get refunds on any deposits made. Your insurer may possibly want to know if there are any liabilities that may crop up once the business closes. Be honest to avoid losing your coverage or getting legal threats.
Landlords: Inform the landlord about business closure at the right time and adhere to your lease notice days- give at least 30 days. If you close the business before lease term ends, you are liable for the rent payments of the remaining days. However, when you vacate the premises after your contract expires, ask for your deposit back- if there is any.
Banks: Close all business bank accounts and ensure that you cancel all credit cards to avoid unnecessary charges.
Lenders: For any outstanding loans, come up with a plan on how to pay them off. Your bank might decide to look at the company collateral if you forfeit this.
Employees: If your business has employees, ensure that you talk to them and let them know the expectations you need from them until the last day of the business. If you are afraid of mass exodus, keep the closure a secret or talk to your most trusted staff. However, ensure to give them at least two weeks’ notice.
Customers: It is important to let your trusted customers know of impending closure, inform them when to expect their last orders, complete any pending projects and fulfill any contractual obligations. If you don't have enough time to carry out the project, inform customers early and give back any deposits or payments made for services not rendered and goods not delivered.
Important Note: In case you have any pending accounts receivable, try and collect these bills before informing customers about closures. If you are unable to receive, your outstanding bills have legal documents in place to help collect money even after you are out of business.
Even as you close down your business, it’s important to give the trusted companies your contacts for future activities. Your former staff might need you as their reference. There are so many details to the above-outlined points that need discussion. To ensure that you close the business legally and safely you need to acquire some legal templates. We recommend that you get them from Starting Business. They have all the templates and legal templates that will protect your personal liabilities.
Good luck and all the best in your future endeavors.
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