It’s easy to think that the bills attached to your business just don’t exist anymore if you no longer run your company. But the simple answer is that it’s never that easy. When you close a business, does the debt that your business owed go away? Not necessarily. Corporations and LLCs are considered legal entities in the eyes of the state. That means if the business takes on debt, it’s the company, not the owners, that will be on the hook. Keeping that protection depends on how you close. You should know that if your business is a corporation or an LLC, it keeps its debts from moving on to you with a formal dissolution of the company.
Plenty of owners skip that step. If you decide to follow your gut and just ignore the bills, you will receive (or are already receiving) numerous dunning letters, billing notices and collection calls. But there’s no magic bullet to erase your business’s debts when you close shop. If your business is a corporation or LLC, you’ll want to get the dissolution process started. Here’s how it works, using Illinois law as the example. (Professional service corporations have their own nuances.)
Follow the Proper Procedures
Start with your own paperwork. If the business is going out of business, you need to follow the proper procedures set out in the company’s bylaws or operating agreement. The agreement governing the business dictates how to close it down: what kind of vote is needed, what needs to be done, and how the money will be divided up. That matters most when there are several owners, each looking to get as much of what’s left as possible. If you don’t follow the procedures, the dissolution won’t be valid.
Next, pay your employees and your taxes. The rule is simple: pay people, pay the government, that’s first, and then worry about the rest. That means wages, including base pay and overtime, and the withholdings, sales and use taxes the business collected, owed to the IRS and the Illinois Department of Revenue. Federal and state laws carry hefty penalties for executives who bail on these obligations. You can’t get rid of unpaid payroll taxes through bankruptcy. If the IRS deems you the “responsible person,” those taxes can follow you for years. Penalties and interest pile up, too. Let your accountant know when you plan to wind up the business so that they can file the last quarterly and annual tax returns.
Then notify the Secretary of State. To dissolve a corporation, you must file articles of dissolution, stating how the dissolution was authorized and the status of the issued shares. The LLC has it easier; all it has to do is file a statement of termination and provide an address where you can be reached. Once the filing is processed, the Secretary of State will update the entity’s status in the public records to “dissolved” or “inactive.” When it’s public knowledge, try to prepare the wind-up so that your creditors and other companies you’ve done business with hear about the company’s dissolution directly from you before they learn it from somewhere else.
Winding Things Up
This is where most of the debt question gets answered. When a corporation or LLC is closing down, it doesn’t have to file for bankruptcy to shield itself from creditors. In Illinois, both the Business Corporation Act and the Limited Liability Company Act provide a statutory claims procedure for barring creditor claims. It works like bankruptcy protection, but it is simpler. You have to follow it exactly, but the idea is straightforward: you can notify known creditors (i.e., creditors that you are aware of) that they have to claim their debts within a specified time period. If they miss the deadline, you no longer owe them. But if a creditor does submit a claim, the company has 120 days to act on it. If the company rejects a claim, the creditor then has 90 days from the rejection date to file suit, or else it’s barred.
You can settle a claim or reject it, but rejecting invites a lawsuit, and it only takes one. It costs big bucks to defend yourself in court. Even if you win, you may end up paying more than the claim is worth. More likely than not, it’s less costly to work out a deal with a creditor early than to reject their claim, while you can still negotiate on friendlier terms.
Then take stock of what the company owns; most owners underestimate it. Even if you have no cash or equipment left in your business, you may still have valuable assets such as trade names, logos and domain names that you can sell to repay your creditors. Those former competitors out there? They might be interested in buying your name. A domain that still gets real traffic may be worth selling rather than letting the registration lapse.
Be careful where those assets go, because creditors come before owners and other insiders. When you’re winding things up, you can’t give yourself any of the company’s stuff until you’ve paid all its debts. If you sell it to yourself or another insider for way less than it’s worth, especially if that leaves the company broke and unable to pay its debts, someone else who had a claim on it can challenge the deal. It’s common for a founder to want to buy something like a patent for a future venture. That’s allowed, at a fair price. You can’t give away or sell the company’s stuff for a song and then leave it in the lurch.
Finally, there is more to closing than shutting off the lights and closing the bank account. When you shut down the company, you should see what you need to do to cancel each license that you have, and cancel all subscriptions so you don’t keep getting charged. If you rent, review the lease to see how to end your tenancy, and check for personal guarantees. Signing a personal guaranty is bad enough, but it doesn’t end when you dissolve the company. It still can be enforced against you personally.
So, back to the question in the title. The company’s debts do not die. They don’t magically disappear when the doors close. Dissolve a corporation or LLC the formal way and most of what it owes ends with the company. Skip the steps, and you could still be on the hook.
