People close their businesses for all kinds of reasons. Retirement, pursuit of a new venture, winning the Mega Millions. COVID-19 stay-at-home orders or just weak demand. You worked hard building that business, spending long hours and becoming an expert in your field. Whatever your reason for closing your business, some essential steps can help the process run more smoothly and efficiently. This overview covers debts, taxes, employee claims, and other issues that may arise during a closing.
Co-owner Approval Requirements
If you’re a sole owner, generally no one else is required to sign off on closing down, though contracts and governing documents can add requirements. In a partnership or LLC, you generally need agreement of co-owners under the governing documents and state law; for a corporation, the board and shareholders generally must approve. The applicable law and governing documents also determine how approvals must be documented. If you need help resolving disagreements, an experienced attorney can offer solid advice.
Once you’ve come to an agreement, talk to your lawyer, who can guide the dissolution process. You will have to work out all the loose ends in every part of the business. Any tiny issue - unfinished contracts, employees’ termination, tax bills - can come back to bite you.
Closing may involve cancellation of permits, licenses, registrations, or trade names at different stages. Legal and tax filings may remain due, and an undissolved LLC or corporation can continue to face taxes, penalties, and filing duties. A lawyer experienced in business can tailor these filings to your company.
Notices to Employees, Creditors and Customers
Notice duties to employees, creditors, and customers depend on the law and existing agreements. Keep accurate records of outstanding receivables and collections. Customers who prepaid for goods or services may be entitled to refunds of their deposits. Refund timing may depend on contracts, available funds, and creditor-priority rules. Check your contracts before you shut down. You may have on-going duties to a customer or client.
Talk to your attorney about the best way to tell your creditors you’re going out of business. A proper notification could limit the length of time they can pursue the debt. That discussion can also cover payment priorities and the consequences of unpaid debts. When a corporation dissolves, state law and federal priority rules generally govern the order in which debts are paid, and paying out of order can expose directors or officers to personal liability in some cases.
An independent attorney or qualified financial professional can review payment priorities for your closing. Creditors may consider a proposal to settle the debt in one payment; existing obligations remain unless revised terms are agreed. When you call a creditor to ask for a reduction, you might be surprised at the answer. Get any “paid-in-full” deal in writing. If you’re drowning in debt, consider a local bankruptcy attorney.
Even if your staff is small, they are employees, and the law requires you to pay them for all work through the day of closing. Employees who signed employment contracts may require you to pay for accrued personal days. And state laws may also require paying these workers for unused vacation and sick time. The WARN Act generally requires covered employers to give 60 days’ notice for qualifying closings or layoffs, subject to thresholds and exceptions.
On a business’s final income tax return, the IRS generally has filers mark the return as final by checking the final-return box. Remember that many state revenue agencies require filings for your final sales taxes. Payroll tax duties can continue during closing. Unpaid taxes can haunt you long after the business is gone, and unpaid payroll taxes can carry with them personal liability.
Federal and state tax agencies may require closing notices or final filings. A CPA can confirm which wage and unemployment reports remain due and when filing duties end. Closing an IRS business account does not cancel its Employer Identification Number. State unemployment agencies also generally need to be notified when a business closes.
A commercial lease generally continues after a business closes unless it is ended under its own terms, including any notice the lease requires, or by agreement with the landlord.
Selling inventory and liquidating assets is an important part of the process for many businesses. Examples include salon or pedicure chairs, computers and printers, appliances and other office furniture. However, holding a closing sale is not right for everyone. Asset transfers can affect creditors’ rights and tax obligations; independent counsel and a CPA can review the consequences.
Before a business asset sale, an accountant can explain the potential tax consequences, including how any losses may be treated. The tax advantages of a business loss may reduce a big part of the headache of closing a business.
Critical Records
Keep all records any federal or state law requires. Some tax records must be kept for years. The IRS generally says to keep records for three years, including when filing a claim for credit or refund, and for seven years when claiming a loss from worthless securities or a bad debt deduction, but exceptions exist. Discuss the particular records of your business with your accountant.
The Equal Employment Opportunity Commission says to keep employment and personnel records at least a year and payroll records at least three years.
Some regulators set their own rules. In North Carolina, a state bar regulation says lawyers must keep client files at least six years after representation. Check federal and state law before throwing away critical records.
Even in a quick dissolution, independent business counsel can review legal documents and explain closing requirements and potential liability. Even in an easy closing, missteps can lead to serious consequences months or years later.
Former employees or co-owners might take legal action if they feel they were mistreated. Even the IRS may come after you years later.
About Delancey Street
Delancey Street is a business debt settlement company that helps business owners nationwide. Our goal is simple: negotiate proposed debt settlements with funders, subject to their agreement. We are based in New York. We tell you how it is; because your business and future is on the line.
