Closing Down Your Startup

Sometimes, entrepreneurs have to close down their company. Of course, it’s not really apparent how this is accomplished from a legal perspective — that is, how to formally close the corporation or LLC. Legally closing down a business occurs in three phases: 1) the company dissolves; 2) the company winds up its affairs; 3) the existence of the company comes to an end. In the first step, the company is dissolved according to either the procedure in the company’s governing documents (i.e.: articles of organization, bylaws, operating agreement), if such documents and/or procedures exist; if not, according to statute. Dissolution is usually accomplished by a vote of the company’s owners, by a sale of all of the company’s equity or all or substantially all of its assets, or by judicial decree. It is important to note that dissolution does not end the company’s existence — there is much more work that must be accomplished before the company comes to an end. Once the company is dissolved, its affairs must be wound up. This includes satisfying all its current liabilities (paying outstanding debts, bills, salaries/wages, leases, etc), as well as, at the option of the owners, setting aside funds in reserve to pay contingent liabilities. This may be important if, for example, your business makes consumer products — if after the company closes a customer has a products liability claim, they may be able to proceed directly against the owners, but having a reserve fund for contingent liabilities allows those claims to be paid from other than the owners’ personal funds. Other winding up activities including collecting accounts receivable, selling assets, and, perhaps most important, filing final tax returns — this is something that some owners forget to do! Paying outstanding taxes is also important for the next step of winding up the company: canceling business licenses, permits, and filing articles of dissolution if the company is organized as a corporation or LLC. Some states require a tax clearance from the state revenue agency, which certifies that all of the company’s taxes have been paid. You can also contact the IRS to close the account associated with your company’s EIN — an EIN cannot be canceled, nor can it normally be transferred to or used by another company. Some states also require notice of dissolution be published in newspapers or journals to give the public notice of the company’s closing (so that anyone with claims against the company can bring them forward). Once outstanding liabilities and taxes have been paid, contingent liabilities funded by reserve (if desires), and the company’s assets liquidated, the residue of the company’s liquid assets can be distributed to the owners in the manner prescribed by its governing documents, or in lieu of that, state law. When all that is accomplished, the existence of your business can come to an end. (Note: you should retain the assistance of an attorney and accounting/tax counsel when closing down your business, to ensure that the process is done properly. The above involves a voluntary closing down of a business — if your business is insolvent or bankrupt, the process is more complicated, and you should consult with a bankruptcy attorney in that case.

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