Closing Down a Business – The 12 Steps of Corporate Dissolution

You’re not the first owner to consider closing down a business and you certainly won’t be the last. But it is a big decision and one that should be taken lightly. Regardless of your final decision, you need to prepare yourself for the necessary steps involved in the process.

Closing down a business requires a certain process be followed. This process is just as important as the steps required to start a business.

I have not failed. I’ve just found 10,000 ways that won’t work. ~ Thomas A Edison

12 Effective Steps for Closing Down a Business

1. Admit It! It’s Time to Close

Making the decision to dissolve a company can be very hard. After all, so much energy and time have been put into the business, and many expectations still remain unfulfilled. However, when the company has been operating in the red or barely breaking even, it’s probably time close it down. Yes, the idea of throwing in the towel is a tough pill to swallow, but once it has been, any feelings of guilt, failure, bitterness or uncertainty over how to close a business will soon fade. Time and energy can then be directed to closing the business in an orderly fashion and with dignities intact.

2. Why Me?  Reflect and Learn

People close down a business for many different reasons, but for the past five years, the most common reason has been the recession and feeding your kids Mac-N-Cheese takes priority.  Tough economic times cause consumers to cut spending on goods and services, which in turn, drives many companies to financial collapse. Here are some reasons why many businesses, especially small businesses, have not been able to weather the tough times:

• Poor Management. A big-time “business killer.” A Dun & Bradstreet survey indicates that 76 percent of business failures are caused by managers who are incompetent or inexperienced.
• Poor Marketing. A business that does not effectively promote the right product to the right market using the right media channels will inevitably find itself ignored like my younger high school self who was trying to talk to girls.
• Anemic Sales Productivity. Oftentimes, businesses do not complement their marketing scheme with salespeople and other customer-facing employees who are trained to do the right thing for the right customer.
• Poor Cash Flow. Poor sales revenue, long-overdue accounts receivables and unexpected increases in the cost of doing business make it difficult for a business to meet daily working capital requirements.
• Inadequate Investment Capital. Businesses become less competitive when they fail to maintain cash reserves devoted to innovation, infrastructure, and skilled manpower. No money … no honey!
• Imprudent Cutbacks. Business owners commonly react to a depressed economy by hastily cutting the budgets for advertising, staff and expansion. However, these panic-driven decisions usually invite financial collapse rather than improve financial health.
• Poor Supply and Delivery Chains. Crumbling can happen when businesses rely too heavily on one or two materials suppliers that folded under the recession. Unanticipated sharp increases in the cost of delivering goods to customers have also lead to business failure.
• Rapid Expansion. Bankruptcy happens when businesses spread themselves too thinly across resource-depleting ventures.

3. Vote Yes to Close the Business

Sole proprietors can unilaterally decide to close down. However, if the business is a partnership, limited liability company (LLC) or a corporation, then all of the stakeholders must decide and vote to dissolve the business entity according to the articles of organization. You should have a lawyer attend the dissolution meeting, take notes and document the decision in a written agreement.

4. Create an Exit Strategy

An exit strategy is a plan to minimize your future risk and get as much money as possible back out of the business. Here are a few possible exit strategies:

• Take the money and run. You could squeeze your company dry by giving yourself big salaries and bonuses, but not to the extent of running up against the law or business debt. Doing this is not always illegal. Consult a business lawyer.
• Liquidate. You could simply call it quits, hang a “Closed Forever” sign on locked business doors and go home. Any proceeds from liquidated assets must be used to pay debts. Whatever is left is divided among shareholders if there are any.
• Bankruptcy. If your business has substantial debt, filing for Chapter 7 bankruptcy is probably the best option. The court sells the business assets for you, and the proceeds are used to pay off lenders, vendors, and other creditors. Debts, long-term leases and other obligations are erased when the bankruptcy proceeding is closed. You should hire a good bankruptcy attorney to draft and file the necessary paperwork.

Whatever the exit strategy, you should consider preserving investments in retirement plans, life insurance and maybe personal disability insurance to protect yourself and your family when it is time to close the business. In addition, you should talk to an attorney and perhaps a business valuation expert to explore all available options before executing any exit strategy.

Failure is inevitable. Success is elusive. ~ Steven Spielberg

5. Timing is Everything

How do you know when the time is right to close your business? Business owners who are strapped for day-to-day money for six months or more should cut their losses and move on. Others whose businesses are doing well but are so stressed out that their health is suffering should consider closing down. Running a business should be a rewarding endeavor, not a source of constant anxiety.

6. Notify Employees

• In the face of adversity, be a good boss. As soon as possible, inform all employees that the business will close. It is only fair that they hear from you and not a third party that they will soon be laid off. After disclosing the news, protect your merchandise from disgruntled employees by collecting keys and changing locks.
• Federal law and the Worker Adjustment and Retraining Notification (WARN) Act requires employers with more than 99 employees to inform them in writing that the business is closing. Employees must receive the notice at least 60 days before the closing date. Some jurisdictions require small businesses to comply with similar laws. This issue should be discussed with a labor and employment attorney to avoid potential liability.
• Issue final paychecks to employees by their last day of work or in accordance with your state laws. Your state may require you to pay employees for unused sick, vacation or other personal time.

7. Notify Customers

Inform all clients that the business will close. Tell them the last date to place any final orders. If you want to be cool, give your customers a list of other vendors who can provide similar goods or services.

8. Notify Creditors

Inform creditors of the impending closure. Try to reduce business debts by negotiating with creditors to lower the principal, interest, and payments.

9. Liquidate Your Assets

• Take inventory of assets, finished goods, and raw materials. Take photographs of each item for sale and note down their serial numbers and brief description.
• Do not overlook intangible assets, such as leases, licenses, permits, patents, trademarks and customer lists. These may be in demand and can be transferred at a price. You may need to talk to an intellectual property lawyer.
• Prepare the assets for sale. Wash, paint or repair the items you intend to sell. Be able to demonstrate your equipment. Make warranties and repair records available for inspection. Donate all non-marketable items to charity to get a tax deduction.
• Hire a qualified appraiser to establish the liquidation value of your assets. This value is usually 80 percent of the retail value. Obtain this information before entertaining any offers from buyers.
• Calculate net sale proceeds by subtracting all of the costs of the sale from the liquidation value figure. Costs include:
  • Commissions
  • Advertising
  • Moving and storage
  • Labor
  • Credit card discounts
  • Rent and utilities
  • Liens on the assets
• Choose the best type of sale for your assets. One or more of the following types may be appropriate:
  • Negotiated sales
  • Consignment sales
  • Internet sales
  • Sealed bid sales
  • Retail or “Going-Out-Of-Business” Sales
  • Public auctions
• Hold the sale at the best time of the year and week. Seasonal items will sell better during the season they are used the most. Sell the assets on the days when likely buyers will be available to attend the sale.
• Hold the sale at the best location. Usually, that is your business premises. Some items, like restaurant equipment, lose value if they are moved.
• Retain a broker, dealer or auctioneer who knows about the type of assets you are selling. He or she can obtain the highest dollar return possible.
• Sell your assets “AS-IS.” You want to disclaim any implied warranties, merchantability, or fitness.

10. Resolve Financial Obligations

• When you are preparing to file income tax returns for the year in which the business closes, mark the box that indicates the document is a final return.
• If you have employees, you must satisfy payroll tax responsibilities. Notify federal and state tax agencies that your business is closing and you will not be filing unemployment returns and an employer’s quarterly tax form.
• Businesses should deal directly with the IRS or get help to close their Employer Identification Number (EIN).
• Settle all remaining debts to lenders and creditors. You should consider filing for bankruptcy if you cannot pay the debts in full.
• Close all business bank accounts and cancel business credit cards.

11. Legally Dissolve the Business Entity

You will continue to be liable for taxes and filings if you do not formally dissolve the business entity. If the business is a general partnership or sole proprietorship, it may not be necessary to take any legal actions to dissolve, but there is no harm in letting the government and creditors know that you are shutting down. Additionally, cancel all unnecessary licenses and permits, and be sure to cancel all business names registered with the local government. Maintain tax and employment records for at least five years after the business is closed.

12. Move On

It’s not you, it’s me.  Actually whatever the reason, you should not think that closing your business means that you failed. Go back to the time when you started your business. Were you afraid of failing then? Probably not. Instead, you were focused on how to make your business successful, so there is no need to be fearful of failure now. Move on.

Feeling alone?  Here are 22 examples of companies who are best known for closing down a business famously:

1. Hostess Brands, Inc.
2. Enron
3. Orion Pictures
4. Pan American World Airways
5. Commodore International
6. Pets.com
7. Bre-X
8. Eastern Airlines
9. 3dfx Interactive
10. HIH Insurance
11. Ansett Australia
12. Nissan Mutual Life Insurance Company
13. Duncan & Miller Glass Company
14. Technosoft
15. Toaplan
16. Boo.com
17. Steve & Barry’s
18. Athena (retailer)
19. Ferranti
20. Circuit City
21. Gottschalks

100% of the shots you don’t take, don’t go in. ~ Wayne Gretzky

Before we begin let me stress “Don’t be a Lone Ranger!” Seeking professional advice from business lawyers, accountants, and the IRS will save you countless hours and help bypass future headaches from complicated, unexpected drama.  Also, a reputable legal document filing service like CorpNet offers inexpensive document filing services to help you close a company starting from just $99 dollars plus state fees.