Closing a business is never easy, but it’s quite common. Studies show that about 20% of small businesses fail in their first year, with 51% closing down within their fifth year. If you are in this situation, you must take some legal and financial steps to ensure a smooth transition and avoid costly implications in the future. Indeed, the process requires careful planning and execution to avoid negative impacts on you, your workers, and your business partners.
Here are important things to do when closing a business.
Decide the best way to close down
Your business closure will depend on whether the company can pay its bills. It’s worth noting that your company will be solvent if it can pay the bills. On the other hand, it will be insolvent if it cannot. As a solvent, you can easily apply to remove your business from the Register of Companies, making it non-existent.
Only ensure it is not threatened by liquidation and hasn’t changed its name three months prior. If you’re looking to close down a business that cannot pay its bills (insolvent), you’ll need to use a creditors’ voluntary liquidation process. Here, 75% of shareholders must agree to liquidation. And this leads to the next point.
Settle your debts and liquidate your assets
Before closing your business, you should settle all outstanding debts, including loans, leases, and vendor invoices. Have a list of every outstanding debt and prioritize paying them based on their urgency. It also helps to negotiate payment terms and settlements with creditors before closing your business. Doing this may prevent disputes that arise when creditors realize you’re calling it quits. On the other hand, failing to settle your debts may attract legal action and affect your credit rating.
You can also liquidate your assets to generate the money needed to settle your debts and cover other financial responsibilities like paying your workers. For example, consider selling your inventory, equipment, and other assets through auctions. And if you still have subscriptions or services you no longer need, cancel them and collect outstanding receivables where applicable.
Notify your employees, customers, suppliers, and business partners
First, your workers need to know your plans to close down ahead of time. By law, you should give your employees at least 60 days prior notice to avoid legal action. After notifying your workers, contact your suppliers and business partners and inform your customers. Provide them with a timeline of your company closure with guidelines concerning refunds, money recovery, and transaction cancellations.
File the necessary paperwork
Before closing your business, you must file several legal and tax-related documents to prevent legal problems. Start by canceling all business licenses and permits you still have. Next, dissolve your business entity with the state, as indicated earlier, and cancel business name registrations. It’s also important to file your final tax return and pay all outstanding taxes before you shut down. You should also cancel your Employer Identification Number (EIN) with the IRS to avoid unexpected charges. You can learn how to cancel an EIN if you are unsure how to proceed. Failing to file the necessary paperwork can attract penalties and even a lawsuit, so ensure everything is in order.