In last week’s bLAWg: Throwing in the Towel: Legal Issues to Closing Your Business – Part 1, I discussed the duties and obligations of closing a business. If you have recently decided to close your business or are looking for alternative options to closing; the below checklist should provide a basic map of what you need to consider. Remember each business is unique and do not consider the below checklist a substitute for professional advice or as a definitive, exhaustive list.
What steps should I consider to Close my Business?
When closing your business, you want to take time to plan things, and a checklist helps organize that process. In general, the goal is to account for assets and liabilities, and make sure you are using the business assets to pay off its liabilities. You want to eliminate liabilities, prior to dissolving the corporation or terminating the LLC. Consider the following:
- If you have advisers, you should talk to them as they can assist or offer advice
- Attorneys, accountants, Bankers, HR specialists, Financial Advisers, Business Mentors
- Sell off your inventory and collect on your accounts receivables – consider during this pandemic you may have to discount or negotiate as cash for others is also tight
- Finish off your obligations to your clients/customers
- Provide notice to the major creditors or those businesses that support your operations;
- Bank, lenders, suppliers, service providers, and utilities
- Time your cancellation of credit cards and subscription services
- Prepare to close your bank accounts
- Landlord – in this case you may wish to review your commercial lease as these tend to be lengthy conversations depending on the terms
- Bank, lenders, suppliers, service providers, and utilities
- Discuss with your employees and pay them out, and remember payroll deposits
- Liquidate everything else possible*
- Settle and paying off your debt, as much as possible**
- Do Accounting and Recordkeeping
- Pay off ALL taxes or prepare what you will need to file for returns
- For example, in Hawaii, if you sell off all your inventory or certain other assets there is a Bulk Sales Tax Form
- Cancel permits and licenses with appropriate government agencies
- Consider providing contact information for forwarding purposes related to the closing business so people may contact you if you miss taking care of something
- If there is any money or other assets leftover review the internal governance documents (like an Operating Agreement for LLCs) and divvy up accordingly to the business partners – yes, this comes toward the end
- Overpaying yourself to the detriment of creditors or taxes you owe is again subjugating yourself to personal liability
- Dissolve the Corporation or Terminate the LLC – ideally, after this you should be done with your business
What’s with the asterisks? Are there other options?*
Strategically, the decision by a business owner to close just means they are personally done with the business. However, consider just because they do not see value in continuing operations that doesn’t mean there is not value in the business. Consider that you could sell the business or its assets to another. For example, maybe a new restaurant owner wants a deal on kitchen hardware, or the landlord is willing to assign the lease to someone who wants to take over the space. Or consider a budding entrepreneur that sees an opportunity to take an established business and rebrand, so selling off the intellectual property and brand to them.
The bottom line is just closing, selling off assets, and squaring away liabilities, does not have to be the only route. While it is likely the case during COVID-19’s economic downturn that your business will not be as valuable as you want, sometimes you being done with your business does not mean its assets, operations, or brand cannot be of value to another.
What if my Debts and Liabilities are More than My Assets? What about Bankruptcy? **
According to the U.S. Bankruptcy Court in Hawaii, 151 residents and businesses filed for bankruptcy protection in June (up 22%). In July, Hawaii bankruptcies flattened to 140 which is just two fewer than the previous year’s findings. Although, federal and state assistance programs have helped during the shutdown, filings may continue to rise during the next few months and even into the next years as aid slows down and ends.
In instances, where you are truly underwater and the debts and liabilities appear to be insurmountable and/or the creditors are not budging in negotiations where they are demanding the full amount and you cannot pay, then yes, the other option is bankruptcy. If this is something you are considering, then understand that this is an even more significant decision than just closing your business.
Some of the steps to filing for bankruptcy include compiling financial records, credit counseling and filing the petition. Consider working with a bankruptcy attorney to make sure you understand what is required to file for bankruptcy, and feel free to contact us for referrals in the Honolulu area.
Anything Else to Consider?
None of the foregoing comments and lists are exhaustive. Every business, and its business owners are unique and may sometimes have special circumstances. If you have a situation that needs specific legal advice, then consult with an attorney, as soon as possible.
However, if you are still considering your options or want to learn more about the steps to close a business and alternative options, then consider joining our upcoming webinar – Throwing in the Towel: Legal Issues to Consider for Closing Your Business on Thursday, September 3, at 12 pm HST. Register here!
