Looking to shut down your company and wondering what the procedures and documentation requirements are?
Closing your business can be a difficult choice to make. When closing a small business or entity, there are a number of considerations you need to keep in mind. Find out below with our detailed insights and step-by-step guide.
What does closing your company mean?
As the title suggests, closing your company means closing up shop. There may be various reasons for this including retirement, relocation or a downturn in your economic fortunes.
Whatever the reason, closing a small business isn’t just a matter of closing the door and walking away. There are a lot of administrative tasks to take care of, just like starting an LLC, and there’s plenty of potential to miss important details.
From the emotional side of closing down a business to the logistics, there is a lot to do when closing down a small business and closing a business is often a complex multi-step process that can take a lot of time, energy and money.
Shutting down your company is called “filing a dissolution.” Doing this allows entrepreneurs to formally close their business with the state.
Why would you close your company?
Retirement, finances and exhaustion are all common reasons for closing a business. A range of factors come into play, including poor business choices, economic crisis, and limited funding.
Economic conditions are a common reason for closing the business. Low national economic growth, often due to a recession or depression can directly affect the company’s operations. Certain business industries can face more severe downturns from poor economic conditions.
Regardless of your reason, you’ll need to consider a number of issues when doing so, including taxes, finances, and relationships with suppliers, employees, and customers.
Closing a business often takes months to properly resolve the situation and tie up loose ends. You’ll need to develop a plan to close your business that will protect your assets and credit as well as maintain your good name in the community you serve.
In the process, you’ll also be protecting others involved in the business, including investors, co-signers, lenders, and even your spouse and other family members. Terminating a limited liability company (LLC) properly can help you avoid fees and fines associated with the end of your business.
How to close your company?
Here’s what you need to know about how to close a business correctly.
Step 1: Determine if you’ll need to vote on dissolution
If you need to shut down your company, don’t immediately jump into filing a dissolution. This especially applies to you if your legal structure is a corporation or LLC. That’s because the decision may not be entirely yours.
If you’re a corporation or an LLC, you’ll have to get approval from your board, shareholders, or managing members before you can go forward with closing down your business.
If they exist, the board of directors at a corporation or managing members at an LLC must first vote and agree on the dissolution. In the case of public corporations, votes from shareholders are also counted with the board of directors.
If you can’t secure your vote, then you’ll need to figure out where the dissonance is among your ownership or directors—you can’t close a business without it. If you have enough votes in favor of dissolution, then you can move on to the next step.
Step 2: Create a dissolution proposal
The first thing to note is that this step is only required for public corporations to figure out how to close a business. If you’re not public, you can move on to Step 3.
If you’re a public corporation looking into how to close a business, however, you’re among those required by most states to formally announce their intent to dissolve in a dissolution proposal.
These proposals are part of public record and name the corporation, along with a statement that confirms a majority vote went into the decision to dissolve.
When filing articles of dissolutions, make sure to also file Form 966, Corporate Dissolution, or Liquidation with the IRS. You have to make sure to get this form within 30 days of filing articles of dissolution.
Step 3: File articles of dissolution
Now that you know you want to close down the business for good—and you’ve gotten everyone on board—it’s time to keep the state you do business in updated by filing articles of dissolution. This is a big step in the process of how to close a business.
What goes into filing articles of dissolution? The corporation or LLC dissolving its business will need to include their name, date the dissolution will go into effect, the reason for the dissolution and, if there is any, information on pending legal actions.
Once you file articles of dissolution with your secretary of state, your business will have its existence formally terminated.
When you’re no longer seen as active, this ensures that neither the business nor its owner will be liable to continue filing annual reports, paying state fees, or be charged fees associated with the business.
So you should file articles of dissolution so the state in which you’re registered to do business no longer sees you as active. That way, you won’t be responsible for any new fees associated with your company.
Step 4: File a withdrawal
Did you previously register your corporation or LLC to do business in another state?
Even if you filed your articles of dissolution and no longer exist in your home state, you’ll still need to go through the process of how to close a business in any other states you do business in. That’s because the business is considered to be active in other states and can still be held liable for its obligations.
Filing a withdrawal allows you to stop doing business in other states and fully terminates the company.
Step 5: Distribute assets
Now it’s time to distribute any remaining assets. Firstly however, if the business has creditors, like small business lenders, these must be paid back before anything else.
Next, any assets that remain are generally distributed to the owners based on the percentage of the business that they own.
LLCs distribute assets to managing members based on their original contributions. Corporations pay shareholders based on the number of shares they own and shareholders will return their outstanding shares.
Options for closing your company?
You can proceed alone with the formalities of putting your company on hold. Be careful with completing the required forms and documents correctly however to avoid wasting time going back and forth with various administrations or potential debtors.
You can also enlist the help of a professional legal service firm to close your company in just a few clicks. These firms often charge less than attorney’s fees. You save a lot of time, hassle and money by letting a dedicated expert complete these formalities.
You can entrust the procedure of dissolving your company to an attorney who can complete the formalities and also offer legal advice. The fees from an attorney, which may be expensive, should be reviewed prior to the engagement.
Cost of closing your company?
You close an LLC the way you start it: with paperwork and fees, which vary from state to state. You file a termination statement with the Secretary of State, paying whatever fees your state requires, if any. Texas says, for example, to use Form 651, the Certificate of Termination of a Domestic Entity.
Businesses may face slightly different procedures and costs if a business is setup as an LLC vs a sole proprietorship.
Filling out the certificate requires listing everyone in charge of your LLC, providing proof you’ve settled all your state taxes and giving the reason for termination: a voluntary decree, a court decision or some trigger in your company bylaws. The filing fee for such Termination is $40.
Can I just close my business?
Not quite, business owners can’t just “walk away” from their business. There are procedures and responsibilities that need to be actioned firstly, similar to canceling a cell-phone contract including creating a dissolution proposal, filing articles of dissolution and filing a withdrawal.
What is the fastest way to close a business?
The fastest way to close your business is to reach out to likely buyers, including employees, to purchase your business and transfer ownership or add a business partner to take over the business. To close a business outright, employ the services of a professional legal service firm.
What happens to employees when a company closes?
The federally mandated Worker Adjustment and Retraining Notification (WARN) Act requires employers to give at least 60 days’ notice to their affected employees of a company closure or mass lay-off. If an employer fails to provide you with this notice, you can collect wages and benefits for each day of failed notice.
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