26 May Read This Checklist Before You Close Down Your Business

For the past month Edwards Law has been focusing on the ins and outs of forming a company, and in particular limited liability companies.  What however if you change your mind about forming a business, you get into a major dispute with a partner with whom you no longer want to do business or if the business fails and you want to close down your business and start a new one?  Make sure you take the following steps to prevent future issues and potential liability.

Preliminary Issues and Steps

Before you make the decision to close down your business, you should consider the following:

• Does your business have value?  If so you may want to consider alternatives, such as selling the business to one or more shareholders or third parties, or via auction, which obviates the need to close down your business.  If you went the sale route, it might be beneficial to get a valuation of your company to see just how much it is worth and how best to handle the sale.
• Does your company have confidential, proprietary information that needs to be protected?  If so, make sure your employees sign a confidentiality or nondisclosure agreement before you make the closing announcement, to ensure that employees do not exit the company with any unprotected confidential information.  Also, decide which business records and other data must be retained and for how long for potential post-closing audits and lawsuits.
• Do you have to obtain consent from other members before closing the business?  Are there any company loan agreements that require you to receive lender consent?  Most loan agreements restrict the ability of the borrower to enter into any fundamental transactions, like a sale or liquidation of the company.
• Will the closing of the business trigger any payment obligations, such as bank loan accelerations, or payments to employees under executive employment agreements?
• Do you have to conduct layoffs?  If so, are there certain key employees you need around while the business is winding down?  If so you should talk with them before layoffs begin to maintain employee morale.
• Are there any tax consequences to consider?  Are there tax benefits to closing v. selling?
• Set a timetable to use for the closing.
• Consider if and how you need to make a public announcement or announcement to current clients about the business closure.
• Make a list of all creditors.
• Prepare an asset inventory for cash, financial accounts, pre-paid expenses, contracts, real estate, buildings, fixtures, equipment, inventory, office furniture, computers, vehicles and intellectual property.
• Are there any executory contracts that need to be resolved to prevent future liability?
• Do you have a reserve account to pay off creditors and cover other costs to close down your business?

Steps to Close Down Your Business

Terminate the Existence of the Company’s Legal Entity

When you close down your business, you must terminate the existence of its legal entity.  This is typically done by dissolving and winding up the company’s business affairs.  To do this, you must:

• Obtain approval for the dissolution from the majority or all (depending on how your operating agreement is drafted) of your LLC members; a resolution approved by the majority of stockholders or all of the voting shareholders of your corporation
• File a statement or certificate of dissolution with your applicable Secretary of State
• Pay all franchise taxes
• Obtain a tax clearance certificate if required by your state’s corporate law

Wind Up the Company’s Business Affairs

To properly close down your business, you must take steps to wind down your business after terminating its legal entity, by doing the following:

• Cease all business operations
• Notify all creditors by providing them actual notice of the business closure and notice of publication in a newspaper, if required under your state’s laws
• Settle with creditors by paying off debts or making other arrangements for payment
• Assign or terminate commercial contracts, and if assigning ensure the transferee provides notice to the non-assigning/non-delegating party to the contract
• If applicable notify suppliers, customers, and other parties in the commercial supply chain
• If applicable terminate all manufacturing, production, distribution and sales of goods and services
• Conduct layoffs, if the company has employees
• Inform insurance and utility companies
• Request refunds of pre-paid expenses, such as insurance premiums
• Collect on outstanding accounts receivable and other monies owed to the company
• Cancel business permits and licenses
• Terminate the registration of fictitious business names
• Take possession of all company assets in the possession of contract partners
• Sell or assign
  • Inventory and comply with bulk sales laws
  • Other assets, such as real estate and intellectual property
    • Assess subleases to ensure they expire before dissolution to prevent liability
    • If assigning a lease, obtain required consents from the landlord, the landlord’s lender and the ground lessor if applicable
    • Assignments of trademarks must be accompanied by a sale or transfer to the assignee of the business or tangible assets associated with the marks
    • Consider abandoning IP registrations and applications if there is no value
  • Securely dispose of records and other data, such as personally identifiable information and equipment/media where that information may reside, in compliance with federal, state and local law, company privacy policies and company contracts
  • Shut down the company’s website and archive a copy for future legal defense purposes
  • Close financial accounts, except a reserve account to pay continuing company liabilities
  • File final tax returns
  • After paying off creditors
    • Distribute remaining assets (if any) to shareholders by cash payment, assignment, bill of sale or deed
    • Collect and cancel all stock certificates
    • Provide shareholders with a statement of the fair market value of any assets transferred or distributed to each shareholder for use in preparing their personal tax returns

Consider/Address Tax Issues

The last steps you must consider to properly close down your business involve obtaining and filing necessary tax documents and information:

• Obtain a tax clearance certificate where necessary
• Report the dissolution to federal (IRS Form 966 for corporate dissolution), state and local tax authorities
• If your company has employees,
  • Issue final wage and withholding information to the employees (IRS Form W-2)
  • Report information from the IRS Form W-2s issued
  • File compliant IRS information reporting forms and distribute corresponding employee statements regarding health coverage as required by the Affordable Care Act
  • File the final employee benefit plan Form 5500
  • File the final employment tax return and attach a statement sharing the name of the person keeping the payroll records and the address where the record will be kept and
  • Make final deposits of employment taxes
• If your company uses independent contractors
  • Issue final payment information to the independent contractors (IRS Form 1099) and
  • Report information from IRS Form 1099s issued
• File final federal, state, and local tax returns for the year the business closes
• Pay final taxes
• Make a decision about whether to terminate any qualified retirement plans

The way you close down your business can mean the difference between starting a new successful business and being embroiled in a lawsuit about your old business’s debts or liabilities.  Make sure you are starting off on the right track by talking to an attorney about the process.  Call Edwards Law today.