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We are one week in to the second stay-at-home work-from-home order. The order began August 27 and is currently set to end on September 9. To ensure that the order does not get extended, please do not gather with those outside of your household. Keep this in mind especially with the upcoming Labor Day weekend. Also, follow the CDC guidelines of wearing a face covering when in public spaces, maintaining 6 feet distance from others, and frequent hand-washing.

The new order has many of us questioning what we can and cannot do. Confused about what’s open and closed? See the below list:

Open

  • Essential Businesses
  • Restaurants: take-out or delivery
  • Public Schools, UH Manoa
  • Child Care
  • Construction
  • Religious services, graveyards

Closed

  • Retail Businesses/Bars
  • Personal Services: Hair salons, Tattoo Shops
  • Beaches
  • City & state Parks/Hiking Trails
  • Gyms
  • Golf Courses
  • Private Schools

As an essential business we are open with new operating procedures. We have adjusted to a rotating work schedule. Only two staff members will be present in the office at a time for social distancing measures, while the rest work remotely. We are available to assist you by phone, e-mail and ZOOM conferencing (upon request) during our normal business hours.

Unfortunately, during the first stay-at-home work-from-home order many local businesses had no choice but to shut down. It is anticipated that this new order will lead to more closures. As we work with many small to medium sized business owners in Hawaii, we understand the stress that is caused when making the call to close shop permanently.

If you are considering closing your business, check out our two latest blog posts Throwing In the Towel: Legal Issues to Closing Your Business – Part 1 and Part 2. We hope to be a source of information for you during these uncertain times as we provide a variety of free resources including, blogs, videos and webinars.

Stay safe and healthy!

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:

  1. 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
  2. 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
  3. 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
  4. Discuss with your employees and pay them out, and remember payroll deposits
  5. Liquidate everything else possible*
  6. Settle and paying off your debt, as much as possible**
  7. Do Accounting and Recordkeeping
  8. 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
  9. Cancel permits and licenses with appropriate government agencies
  10. Consider providing contact information for forwarding purposes related to the closing business so people may contact you if you miss taking care of something
  11. 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
  12. 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!

DISCLAIMER: This post provides general information, but does not constitute legal advice in any respect. No reader should act or refrain from acting based on information contained in the post without seeking the advice of an attorney in the relevant jurisdiction. Hew & Bordenave, LLLP expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

Are you a business owner thinking of closing your store, restaurant, or bar? You are not the only one who has thought about it. In fact, many already have.

In Honolulu, walk around any neighborhood whether it is Downtown, Kalihi, Haleiwa, or Mōʻiliʻili and you will see that some businesses are gone. In some cases, for good. Surveys conducted indicate that approximately 900 businesses in Honolulu have closed either permanently or temporarily since the COVID-19 pandemic has started. Additionally, we know that the pandemic is not subsiding prompting the government to step up its regulations. Just recently bars on Oahu have been forced to close for an additional three weeks due to Mayor Caldwell’s Emergency Order 2020-23.

This post is for those thinking that it might be best to get out of the business they are currently in and some of the legal issues they must consider before “throwing in the towel.”  

The decision to close your business is not something to take lightly. While, you may have been one of those people that woke up one day and said, “I’m going to start a business,” while learning how to run the business along the journey. This wisdom and experience should have also taught you that the process of closing a business is not necessarily easy or straightforward. It is a process.

The worst decision to make is running and hiding from responsibility or closing too quickly without wrapping up your duties and obligations.

What are my Duties and Obligations?

If you’ve been running a business for several years, especially one that has some physicality to it, such as a storefront, inventory, or employees that report to you, then you realize all the responsibilities you have. First, you should make a checklist of the relationships that you as the business owner and the business itself has with others. This will help you map out all the people you will need to deal with as you wind down operations and move to closing the business. Especially, if you have an LLC or corporation that exist, then understand that your limited liability protection comes from the fact these entities are separate legal persons from the owners. The entity is on the hook for some of the contractual obligations and duties set at law.

Ask yourself about these relationships and what contractual and/or legal obligations and duties you have to:

  1. Business Owners – who needs to decide to go through with closing the business? Consider business entities that require votes by the partners, members, or shareholders to formally begin the process.
  2. Customers/Clients
  3. Vendors/Suppliers
  4. Landlord
  5. Financial Institutions, Banks, and Credit Card Companies
  6. Utilities and Service Providers
  7. Other Lenders (e.g. friends and family give you a loan?)
  8. Employees and Contractors
  9. Federal, State and County Governments (e.g. your taxes, licenses, and permits)
  10. Outstanding Lawsuits (if your business is currently in a lawsuit you may have to delay your plans of closing the business till this is resolved)
  11. Business Owners (e.g. if you are Managing-Member of an LLC members group, you have certain obligations to them prior to closing the LLC)
  12. Anyone other creditors

Consider that anyone of these may have a cause of action (lawsuit) against you or the business if you do not properly deal with them. Many of them are creditors and in some instances if you don’t pay or do what you are supposed, they will sue you to attempt collect their money. Did you give your customers coupons to use? Did you buy inventory on credit? Is the credit card paid off? How long is left on the term lease? Do you have enough money to cover payroll? And so forth.

The business owner is responsible to figure out how to end these relationships and the outstanding liabilities on them. However, what you should not do is run to dissolve the business entity first just because the liabilities are so big and onerous.

Why is Proper Notice so important?

Too many times I have seen LLC members think it is a good idea to terminate their LLC when they have not notified their creditors. They don’t understand doing the “hard stuff,” that is notifying creditors is really saving them from personal liability. They have a duty to notify creditors that they are closing to limit debt, not terminate the LLC and run and hide. This latter choice creates personal liability – in effect, you are causing the business entity to cease to exist without taking proper steps, thus eliminating the limited liability shield.

Anything Else to Consider?

None of the foregoing comments and lists are exhaustive. Each business, and its owners are unique and may sometimes have special circumstances. If you have a situation that needs specific legal advice, then consult with an attorney, the sooner the better.

However, if you are still considering your options or want to learn more about how to close a business, then consider joining our upcoming webinar – Throwing in the Towel: Legal Issues to Consider for Closing Your Business on Thursday, September 3, at 12 p.m. Register here!

Also, stay tuned for our bLAWg next week, that will cover: (i) a checklist of steps to consider when closing your business; (ii) other options instead of closing your business; and (iii) what to do when the business’s debts and liabilities vastly exceed its assets.

DISCLAIMER: This post provides general information, but does not constitute legal advice in any respect. No reader should act or refrain from acting based on information contained in the post without seeking the advice of an attorney in the relevant jurisdiction. Hew & Bordenave, LLLP expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.