Why Do Businesses Have to Shut Down?
Business owners close down their businesses for all kinds of reasons. Sometimes they’re losing money or going bankrupt. Other times, they just don’t have the time or energy to keep going anymore. Some people want to retire and others try a different career.
Financial problems are usually what pushes people to close their business. When you’re spending more than you’re making month after month, it gets harder to turn things around. Your debts pile up while your bank account shrinks. If your business can’t pay its bills and you don’t have the legal protections that come with being a corporation, you could end up having to pay those business debts with your own money.
Sometimes it’s not about money at all. There are plenty of business owners making decent profits who still close up shop when they’re ready to retire. Selling a business can be pretty hard, so they just shut it down instead. Family situations come up too where you need to spend more time at home than your business would allow.
There’s another way businesses can close that you might not expect. If you don’t pay your business taxes or you forget to file those yearly reports the state wants, they can shut down your corporation themselves. It’s called administrative dissolution. It doesn’t matter if your business is doing great or if you meant to file those papers, the state will just cancel your corporation status if you miss their deadlines.
When the state shuts down your corporation like this, you lose those legal protections straight away. Suddenly, you’re personally responsible for any business debts, contracts, or legal problems, the same ones you thought your corporation was protecting you from. If you have any professional licenses that depend on your corporation being active, those won’t be valid anymore either. To get your corporation status back, you’ll need to pay the taxes you owe, plus penalties and file those reports you missed.
How you actually close a business depends on what kind of business you have and which state you’re in. If you’re a sole proprietor, you just stop doing business and file your last tax return. But if you have a corporation, there’s quite a bit more to it. You need to get your shareholders to vote on closing the business. You have to let all your creditors know what you’re doing. And you need to make sure any money or property that’s left gets handed out in the right order.
Steps for Closing Your Business
Preparing for business dissolution involves several steps to ensure a smooth and legally compliant closure.
Tell the IRS and your state and local tax agencies
You’ll need to let the Internal Revenue Service (IRS) and your state and local tax agencies know that your business is closing so they don’t think you’re still active for tax purposes. Most business owners find this part pretty easy once they get the right paperwork together. You’ll need to file your final tax returns, close your Employer Identification Number (EIN) account, and pay any taxes you still owe. Tax agencies keep records of active businesses for years after they close. If you don’t tell them you’re closing, they’ll think you still owe taxes even after you’ve stopped running your business. Your old business could get hit with penalties that come back to you personally based on how your business was set up.
Cancel all your business licenses and permits
You need to cancel all your licenses and permits so no one else can use your business name, seller’s permit, or licenses in ways that could make you responsible for taxes or penalties and each city, county, and state has different laws for how you do this. You’ll usually need to get in touch with the agencies that gave you these licenses, fill out their forms, and pay whatever fees they ask for.
Let everyone know you’re closing
You’ll need to tell your creditors, insurance companies, lenders, vendors, service providers, and suppliers that you’re closing your business. This gives them time to close your accounts, change payment terms, or make final arrangements for any goods and services they give you. The vendors who’ve worked with you should get a heads-up so they can plan ahead too. When you’re open and honest with everyone while you’re closing down, then you’ll keep your reputation in one piece. If you tell everyone early enough, you can avoid arguments and keep strong relationships with these people and businesses.
Tell your landlord
If you rent or lease your business space, you need to let your landlord know you’re planning to close. Most commercial leases spell out what happens when you close your business, so check those. Check your lease to see how much time you need to give and if you’ll have to pay any penalties for leaving early. Sometimes, you can work out a deal with your landlord to end your lease early.
Get the money people owe you
Before you close your business, make sure that you get paid for any money that clients or customers still owe you. Unpaid invoices are money you’ve already earned by doing the work. Some clients might think that, just because you’re closing, they don’t have to pay you anymore. If you professionally go after this money now, you won’t lose it forever. You might need to send reminders, work out payment plans, or even take legal action. When you get this money back, it can help pay off what you owe and maybe even leave some extra money to split between the business owners.
Sell your company’s assets
To get the most money from what your business owns and cut down on what you might owe, you should think about selling your company’s property, equipment, or inventory. Once people hear you’re closing, these assets usually lose value pretty fast. The money you make from selling these assets can go toward paying off debts, covering the costs of closing down, or splitting between the owners. You might want to hire a professional appraiser to figure out what your assets are worth and talk to a business broker or auctioneer who helps you sell everything.
A lawyer who works with business closings helps you through the steps you need to take and be sure you follow the legal requirements which can be different from state to state.
Find My Lawyer Now!
How to Close Your Business the Right Way
When you need to close down a business, there are a few important steps you’ll need to take. If you go through this process correctly, it will protect you from future liability and help you have a clean break from all your business obligations.
If your business is set up as a corporation or LLC or partnership, the business partners need to agree on the decision to dissolve. If you don’t have the right paperwork in place, disputes can come up later down the road. It’s usually controlled by your company’s organizational papers or state business laws. You should write it down in your meeting minutes or through a written consent form.
After doing this, you’ll need to let state and local government agencies know that you’re closing. This frees you from legal liability for business taxes and filing requirements. It also lets creditors know that the business can’t take on any more debt. If you skip this part, then you’ll still be responsible for future tax obligations, even after you stop running the business. Each state has its own business division, which is usually part of the secretary of state’s office, and they’ll have the forms you need. You should talk with a local attorney about this, since the laws are different in each state. What works in California won’t necessarily work the same way in Texas.
Doing this will stop other people from using your seller’s permit or business name in ways that could leave you responsible for taxes and penalties. The cancellation process usually means contacting the agencies that gave you the permits and licenses in the first place. If you’ve been operating under a fictional or assumed business name, you should also submit an abandonment of that name.
You’ll need to let the important parties know that your business is closing. You should let employees know at least two weeks before their last day and customers should get plenty of time to finish up their orders or projects. If you can’t deliver what your customers need before you close, make sure to return their deposits and payments for any goods you haven’t delivered or services you haven’t provided.
You’ll need to make all your final payroll tax deposits, submit your final employment tax forms, and take care of any tax bills you still owe. Tax agencies will still come after you even after you close your doors. An attorney helps you through this process. If you don’t dissolve your business correctly, the state might still see it as active. That means you’d still have to follow state requirements, submit annual reports, and pay state taxes.
What Legal Problems Come With Business Closure?
If your business is closing down because it’s not making money, then you’ll need to take care of all its debts before you can shut the doors. You’ll have to let all your creditors know about the situation and make sure they get paid during the closing process. Business debts that don’t get paid can become your personal problem and it will depend on how you set up your business. Some of these debts might follow you around even after you close up shop. Your personal assets like your house or car could be on the line if you didn’t keep your business and personal finances separate.
Your business probably has contracts with other businesses for services, supplies, or leases. These contracts don’t just go away when you close your business. You’ll either need to finish what you promised in these contracts or cancel them according to their termination clauses. When it comes time to split up what the business owns, everything can get messy. That’s also the case if the business made decent money over the years. Arguments about who gets what can ruin friendships and eat up whatever money is left in the business. People who used to be partners might not see eye to eye on what’s fair. If business owners can’t work it out themselves, they might end up in court.
Business owners need to figure out if they want to sell the whole business to someone else or close it down and split up what’s left between the owners. What you choose can affect everything else that comes next. The paperwork you signed when you started the business or became a shareholder usually spells out how to split everything up when the business closes.
When you have everything written down, it stops expensive legal fights when you’re closing the business. If you write down who gets what, there’s no guessing later. Deals you made with just a handshake usually don’t work out when people start arguing.
Let’s say you run the business by yourself. You can close it whenever you want. You’ll use whatever the business owns to pay off what it owes and then you keep whatever’s left. When you have partners in the business, it might close when the partners agree to shut it down or if one of the partners dies. Partners don’t always agree on when to close the business. Your partnership paperwork should say how to split everything up when the business closes.
With corporations, you usually need most of the shareholders to vote yes before you can close the business. After the shareholders vote, the lawyers take care of the rest of it. The papers you filed when you started the corporation and your shareholder agreement will tell you how to split up what’s left when everything’s done.
Do I Need to Speak With a Lawyer for My Business Dissolution?
If you’re thinking about closing down your business or if you’ve been ordered to shut down, then you need to talk to an experienced business attorney. When you close a business, it’s going to affect every single business relationship you’ve built over the years. LegalMatch can help connect you with the right business law attorney for your specific needs.
When a business closes down, there may be a whole bunch of legal requirements that most business owners never think about ahead of time. Every state has different laws and each type of business needs to follow different steps. If you miss even one deadline for filing paperwork, then the whole process can take months longer and you’ll still be liable for legal problems. You’ll see creditors show up with claims you never expected. Your tax bills don’t just go away when you close your doors. Your personal money and property are at risk until you take care of every single legal requirement correctly.
If you have employees or if you still owe them money, employment laws create even more problems. You have to be really careful with your final tax returns and some tax bills can become your personal responsibility if you don’t close the business correctly. Government agencies might also take a close look at whether you followed the laws while you were in business.
When you have to cancel contracts, well you’re looking at another whole set of problems. Your agreements with suppliers don’t just end because you close. You might still have to pay rent long after you stop doing business and some contracts have penalty clauses that make you pay extra fees when you close down.
An experienced attorney who handles business closures will show you the steps you need to take to close your business. They’ll help you get the right forms and file them correctly and they can represent you in court if any legal problems come up. The paperwork alone is too much for most business owners.
You need a lawyer when people start fighting over who gets what from the business, or when government agencies question your paperwork.