While there is plenty of advice floating around about how to bounce back from a business failure, and how to learn from it, that is the end of the process. It is just as important to be prepared to handle everything that leads up to it. Closing a small business isn’t just a matter of closing the door and walking away. There are a lot of administrative tasks to take care of, and there’s plenty of potential to miss important details. This is how to close a business, both the emotional and practical steps to take.
How To Close A Business: The Basics
From the emotional side of closing down a business to the logistics, there is a lot to do when closing down a small business. Believe it or not, closing a business is often a complex multi-step process that’s going to take up a lot of your time, energy, and yes, even money.
This post walks you through everything you should know to avoid financial issues and legal penalties that can result from your business closure. While we don’t recommend doing this all by yourself (you should at least work with a lawyer and a CPA), it’s wise to understand what you’ll need to take care of in the coming weeks and months.
Figuring out how to close a business? Follow these common steps:
- Make the toughest decision
- Prepare for an orderly and strategic shut-down
- Get all decision-makers on board
- Let your staff know
- Collect on outstanding accounts
- Alert your customers and begin closing accounts
- File dissolution documents
- Take care of your tax requirements
- Cancel business licenses and permits
- Pay your outstanding debts
- Consider bankruptcy options
- Distribute assets and close your financial accounts
- Keep records
- Take time to mourn
- Bounce back and move on
Finally, while we’ve given these in a bulleted list, your exact steps or timeline may differ depending on your needs. Let’s look at each of these further.
1. Make the Toughest Decision
The first step in this process is putting aside emotion for just long enough to take a good, hard, honest, look at the state of your business. Once you do that, you can make the toughest type of business decision there is: do you do whatever you can to keep your business going, or do you shut it down?
A post from Daily Worth, 6 Signs It’s Time to Close Your Business, highlights key indications that it is time to call it quits. Red flags of a failing small business include:
- Using personal credit cards to cover expenses because you are falling short of revenue projections
- Developing personal health problems
- Loving your product more than your customers do
- Having your key employees leave
Another post from American Express OpenForum makes another key observation: If you’re no longer having fun, it is probably time to quit. After all, isn’t having fun and following a passion the reason you started your business in the first place?
2. Prepare for an Orderly and Strategic Shut Down
Once you’ve made the decision, your work of closing down a small business is just beginning.
For example, you’ll need to figure out how to liquidate assets, pay creditors, close customer accounts, lay-off staff, and a million other little details. The process can be overwhelming, which is why it is a good idea to seek professional assistance from lawyers, accountants, brokers, and other business specialists.
Another good place to start figuring out what you’ll need is the Getting Out section of the Small Business Administration (SBA) website. The Steps to Closing a Business article walks you through key steps including how to file dissolution documents, how to cancel registrations, permits, licenses, and business names, how to comply with employment and labor laws, how to resolve financial obligations, and how to keep all the appropriate records. Refer to Legal Resources for Exiting for links to helpful articles.
The IRS Closing a Business portal also provides resources that will help you meet all tax requirements, and ensure that you do not make mistakes that will end up costing you money in the future. The Closing-a-Business-Checklist provides links to twenty forms you may need. Even if you don’t want to handle these yourself, the checklist is a good place to look to help you know what to discuss with your lawyer and/or accountant.
3. Get All Decision-Makers on Board
If you run a sole proprietorship, or if you are the only LLC owner, you can make the decision and wind it down yourself.
If you have partners or investors, though, it will need to be a group process. You’ll need to talk to any partners and investors about the decision first, and follow the business closure process you outlined in any written agreements.
4. Let Your Staff Know
In the steps of how to close a business, this is where it will get real. Tell your employees as soon as possible; you don’t want them to get the news from anyone else but you. If you’re looking at mass layoffs, you’ll need to make sure you comply with employment and labor laws, which includes making the proper employee payments after closing. In general, if you employ over 100 people, you’ll need to provide at least 60 days’ notice before closings and mass layoffs.
Check the U.S. Department of Labor’s Employment and Training Administration Fact Sheet for more information.
5. Collect On Outstanding Accounts
Once you announce the closing of your business, it will be difficult to collect on any outstanding payments. And, with taxes and legal fees, you’ll need the cash on hand.
Develop an aggressive collections strategy for any unpaid accounts before publicly announcing that your business is closing. You can do this by offering discounts for immediate payments or calling the account manager directly (or visiting them in person).
6. Alert Your Customers and Begin Closing Accounts
Once you’ve collected as much as you can, let customers know about the closing in a fair amount of time so that they can begin making alternate arrangements.
Closing a business is difficult for you, but it’s also going to be difficult for the customers who have come to rely on your services or products. Do not leave them stranded at the last minute.
7. File Dissolution Documents
If your business is registered as an LLC or corporation, you’ll have to file for dissolution in the state where you registered the business, or you’ll be on the hook for continued taxes and business debts.
The rules for filing a Certificate of Dissolution vary from state to state: some require you to settle creditor debts before you file for dissolution, while others require you to file for dissolution first. Be sure you check your state’s rules to be sure and talk with an accountant or lawyer to be sure. In general, sole proprietors do not have to file anything with the state.
8. Take Care of Your Tax Requirements
It depends on your business, but at the very least you’ll usually need to:
- Submit your final income, sales tax, and employee tax returns to the state and federal government
- Cancel your Employer Identification Number (EIN)
- Report the sale of any business assets
To make sure you don’t miss a step, review this IRS checklist.
9. Cancel Business Licenses and Permits
You will have to cancel with any agency that issued you a license, registration, or permit. The steps for doing so will depend on the agency.
This is important as it will keep anyone else from using your business name or account—which can hurt your reputation and leave you on the hook for various taxes and penalties.
10. Pay Your Outstanding Debts
Make arrangements to pay any outstanding debts as you wind your business down. This includes not only what you owe to lenders, but to various suppliers and vendors who serve your business. You could consider contacting your creditors to negotiate what you owe.
Liquidating your business assets is also a good way to turn things like office equipment and customer lists into cash that can be used to repay debts.
11. Consider Bankruptcy Options
Hopefully when closing down a small business, you will be able to close the business without having to declare bankruptcy. Unfortunately, that’s not always possible. In extreme cases, you may need to consider filing for bankruptcy. If bankruptcy is your only viable option, be sure to check out Declaring Bankruptcy on the IRS website.
However, don’t make that decision too hastily. The High Cost of Saving a Failing Business, from the Wall Street Journal, provides examples of costly small business bankruptcies that cost anywhere from $100,000 to $600,000. As noted, before you choose bankruptcy, take a close look at every possible business asset you have. Just about everything from customer lists, to office equipment, website domains, buildings, social media accounts, and trademarks will have some value.
12. Distribute Assets and Close Your Financial Accounts
If you have made final payments to your employees, paid state and federal taxes, and also settled your debts, then you can distribute remaining assets to yourself (and other partners or owners, if applicable).
Once that is done, you should close your business bank account and cancel any business-related credit cards.
13. Keep Records
It’s wise to keep all your important records, including tax and employment information, for three to seven years after shutting down your business. Some records, like your articles of incorporation, should be kept on file permanently.
For a more detailed look at what to keep, check out this useful article.
14. Take Time to Mourn
You will likely be so wrapped up in the many details of winding down your business that the loss won’t really sink in until it is all done and you wake up one morning with nothing left to do but reflect upon your failed small business.
When this happens, most experts predict that you will go through the same five stages of mourning and grief that people universally experience: Denial and Isolation, Anger, Bargaining, Depression, and Acceptance. The five stages of grief for a failed social entrepreneur directly relates these stages to a small business failure, with a slight variation to:
- Picking yourself up to start again
Typically these stages of grief take time to work-through. But, The 24-Hour Trick for Getting Over Failure from inc.com suggest that if you take one day to intently focus on your failure, including taking the time to cry, scream, pout, and otherwise wallow in grief and self-pity, it will help you quickly move more quickly through the mourning process to acceptance.
15. Bounce Back and Move On
Once you’ve fully recovered from your small business failure, you’re ready to start again. This can mean anything from another entrepreneurial venture, to joining an existing start-up, to getting a traditional job with a traditional company.
The restart can be easier said than done, but if you learn from your failure you will likely end up in a better place than you were when you started the business that failed. The Harvard Business Review article, Strategies for Learning from Failure, examines how companies learn from failure and identifies effective and ineffective approaches. It discusses “the right way to think about failure” that will put you back on the track for future success after a business shut-down
Hopefully your next small business will be wildly successful and you will never have to face the prospect of its demise, or the complications of how to close a business again. But, if you do find yourself in that situation it is always helpful to know that you are not the first, that you are not alone, and that you can bounce back again.
If you do plan to start another business, know that there are tools that can make it easier to manage. PaySimple makes payments, invoicing, and other financial details simple so you can ensure better cash flow and payments in your next business venture.
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