Starting and running a business can be an exhilarating ride. Unfortunately, sometimes the best-laid plans can unravel, and you might need to close down the business. Just like starting a new enterprise, closing one down involves a series of steps you need to follow to successfully dissolve a business venture.
It should be noted that according to Reference for Business's Encyclopedia of Business, the majority of small business owners find success with their endeavors. A more common phenomena than an outright business failure, however, is a split between co-owners, what legal professionals refer to as a business divorce.
A business dissolution, not to be confused with business failure, does not necessarily include a financial loss for the owners, although that can be part of the process. While overwhelming debt, a lack of market appeal, or unsustainable growth can all be reasons for dissolving a business, people can also do so for personal reasons, such as retirement or a lack of passion.
"Legal professionals often refer to a co-owner split as a business divorce."
A business divorce can be a voluntary split. More often than not, though, the divorce is one-sided, and it can easily become messy, with fighting and lawsuits making things worse. Judges and lawyers use this euphemism to describe this process since it tends to resemble an actual matrimonial divorce due to partners spending so much time together and generally having entangled assets and pent-up anger.
Properly close the business
You will have to dissolve the business according to whatever established articles you have in place. If you're a sole proprietor, all you have to do is hang up the "closed" sign and lock the doors. General partnerships without a written partnership agreement can also be effortlessly dissolved by giving due notice to the partners in writing.
Dissolving a business is a tough choice, but sometimes it's necessary.
However, dissolving a business that has a written partnership agreement, such as in the case of an LLC or a corporation, will involve following whatever rules the articles of incorporation or partnership agreement delineate. Many of these agreements contain clauses or provisions that require a certain percentage or majority vote to proceed with the dissolution.
Since many businesses start off small and are either family run or built between friends with ample optimism and high hopes for their success, the owners generally do not anticipate the need to plan for an exit route. Either they forego adding dissolution language to their incorporation articles or they simply do not have any articles and instead formed the business with an oral agreement or handshake. If there are no upfront buyout options or exit routes, hiring an experienced business divorce lawyer gives the owners a distinct advantage in dissolving the enterprise.
Provide notice of the impending business closing
If you're dissolving a corporation or LLC, you will have to file paperwork to inform the state that your business is no longer in operation. Most states require the business to file paperwork with the secretary of state. For instance, the New York Department of State requires you to file a Certificate of Dissolution Form with their office.
By filing these forms with the state, it releases the business from any future tax liabilities and alerts creditors and vendors that the business is no longer able to incur any debts.
You will also have to notify essentially every entity you transact business with on a regular basis. This includes your suppliers, utility providers, banking or credit institutions, lenders, landlords, employees, and customers. While you should notify many of these entities as soon as possible, it might be wise to wait until the last possible moment to inform employees and customers of the closure. Telling employees too early can lead to panic and an early exodus, and customers may elect to cease payments on outstanding invoices if they think the business will not be around for much longer.
Resolve outstanding taxes and debts
Be sure to pay off any federal and state back taxes first and foremost. This includes any applicable employment-related taxes, income taxes, and sales taxes.
"Be sure to pay off your taxes before all other debts."
The Internal Revenue Service provides a useful guide containing the various tax forms you might need. Some state tax boards require the filing of a "clearance" or "consent to dissolution," which declares that the business is up to date on all tax filings. After finalizing the business's taxes, you will also need to resolve any outstanding debts with creditors and ensure the business does not hold any assets in arrears. If it doesn't look like the business will have enough funds to cover the amount of debts it has accrued, bankruptcy might be a better solution.
Who can help?
Based in Buffalo, New York, Lipsitz Green Scime Cambria is experienced in successfully guiding clients to prevent or minimize the loss of assets in the event of a business divorce. Whether you're engaged in a general partnership, limited partnership, corporation, or a limited liability company, the firm's business dissolution attorneys will work hard to protect the owners' interests and minimize losses if the business ends.
Lipsitz Green's business attorneys draft written agreements for clients at the onset of a business relationship, protect the interests of clients who feel they are on the verge of a business divorce, and fight for clients engaged in business dissolution litigation.
This article does not purport to give legal advice and is for informational purposes only.