14/5/2015 0 Comments
When the time comes, for whatever reason, to close the doors on a business venture, the process is always a bit more involved than simply locking up and walking away. This is true of all businesses in all industries. There are risks involved with closing – namely the loss of reputation, exorbitant and avoidable fees, and potential lawsuits. Making sure you do the right things in the right order is essential to protecting your future endeavors and assets.
To help with this, here are eight relatively straight forward steps that any business owner in any business could use to help better protect themselves when closing their business:
First Step: Take Care of Outstanding Receivables
One of the first things you need to do is take care of any outstanding receivable accounts. If anyone owes you money, you won’t be around to collect after closing so begin aggressive collection attempts as soon as you can after the decision to close has been made. Here’s a quick checklist of how to do this:
1. Don’t announce you are going out of business, but just make the collection attempts. Once customers know you are going out of business, they may attempt to avoid paying until you close.
2. Offer discounts on any old accounts. The bottom line is a partial payment is better than no payment at all. As the time of your closing approaches, you can increase the discount on any accounts that remain unpaid.
3. Don’t rely on the mail alone. Actively call and email you customers as most people check their phone and email many times a day and mail just once at most.
4. As a final resort, you can always sell off any accounts you cannot collect to a factor. You’ll only get a small portion of the debt you are owed back this way, but again – this is better than no recompense at all.
Second Step: Take Care of Current Customers & Contracts
Often business owners are unsure how to announce they are closing to their customers. The best way depends on the size of your business. If you are a large business with a large geographical footprint, consider using a press release. If you are a smaller business, running a small statement in a local paper should suffice.
Additionally, you’ll need to take care of any in-progress or outstanding work orders or contracts in order to avoid possible complications over any unfulfilled legal obligations. Make sure you fulfill all current orders. If you know that you’ll be unable to fulfill an order – you need to refund any payments already made on the jobs. If you cannot do so immediately, work out a payment plan.
On top of this, examine the termination clauses of any contracts you are currently under to see what you need to do to terminate it in order to determine if you should attempt to fulfill the contract or terminate it. Consult with any customers you have such contracts with about your situation and explain what is going on when you ask to terminate.
Third Step: Begin to Sell Assets
The best time to liquidate things like inventory and company assets (vehicles, office equipment, etc.) is before you close the doors. Heavily discount all remaining inventory if your business is retail. Be sure to let all employees and customers know so that you can liquidate as much of the inventory as possible. If you are a larger business with more substantial assets, consider auctioning them off and, again, promoting the sale to ensure all your employees and contacts know about it.
Once you’ve closed the doors, that doesn’t mean you can’t keep selling what’s left of your equipment and inventory. Take what’s left online. There are all kinds of sites to sell new inventory (Amazon) or even move old office equipment (eBay, Craigslist, Liquidation.com). If you need to move warehouses worth of inventory, there are even specialized sites like Genco that will buy in bulk.
Fourth Step: Take Care of Outstanding Debts
Depending on what state you are in and what type of creditors you have (bank, private, etc.), there are specific laws that will govern how and when you must notify with your intent to close your business as well as how long you could be sued for any unpaid debts. Keep in mind you need to research the specific laws according to your unique business, but here are a few guidelines to help out:
· Bank Loans: If your loan is from a bank, it’s important to keep in mind they can call your note due or deduct the sum from your balance as soon as they’ve been informed you intend to close. Make sure you are prepared for this to happen before you inform a bank you have a business loan with that you are closing the business.
· Suppliers: The best way to handle this is to not let them know until just as you are closing up. This way you can get all the supplies, etc. you need right up until closing. Then you can simply let them know you’ve closed and ask for your final billing.
· Sole Proprietorships & Partnerships: Notify any parties of this sort that you owe money to of your intent to close via a letter where you also ask for a final bill from them. You will likely want to publish notification in your newspaper for any creditors you may have overlooked to protect yourself against lawsuits.
· Corporations & LLCs: Notify any creditors of this sort via a letter with the specific information your state requires for creditors submitting claims (Be sure to check with your state or your business attorney for help with this). Include in this letter an official statement that missing the deadline will result in their claim being barred.
Fifth Step: Take Care of Current Employees & Pay
This one can be a bit tricky. Be wise about when you choose to tell your employees that you are going to close. Because they depend on you for income, telling them in the wrong way at the wrong time can be costly. The first thing you need to do is determine how you need to handle their final paycheck according to your state.
Once you know how you need to handle this, you can either give them ample notice with plenty of time to find another job, or wait until the last minute to tell them. Both have their advantages and disadvantages. If giving notice, you’d want to offer to help them with recommendations and make it clear you want them to succeed to motivate them to remain loyal. The worst thing that can happen is your employees quit when you need them around for three more weeks.
If you are going to let them know at the last moment, make sure you have their paychecks ready and have followed all legal obligations.
Sixth Step: Final Deposits & Payroll
After paying your employees and running your final payroll, all state and federal employment tax forms and deposits should be made as usual. IRS Form 656 is available if you need to ask for a reduction in the amount to be paid. IRS Form 433-A is, alternatively, an application for a payment plan for employment taxes.
Seventh Step: File Final Taxes (Sales, Income, Employer Etc.)
There are a few taxes you may need to pay depending on your type of business:
· Final Sales Tax: If your business sells products, make sure to file your State sales tax forms along with all taxes owed at the date your business closed. Also, write the word “FINAL” across your form’s top and contact your state about the right way to close your business tax account.
· Final Employer Tax Return: If you had employees or contractors, you’ll need to file your final employment taxes. If you file quarterly, use IRS Form 941, if you file annually, use IRS Form 944 along with your IRS Form 940 or 940-EZ. Make sure to note these forms as final and include any payments due. Additionally, you’ll need to issue W-2s and 1099-MISCS to employees and contractors. To report these, use IRS Form W-3 and IRS Form 1096 respectively.
· Final Income Tax Return: On the final year you owned your business, you’ll have some certain requirements on how you file your personal income tax returns. These depend specifically on how your business is setup:
o Corporations: On your IRS Form 1120, make sure to check the box that indicates this is your final return. Use Schedule K-1 to report shareholder allocations. Additionally, your corporation will need to be dissolved which can be done via IRS Form 996 no later than 2 months & 15 days after your final day of business.
o Partnerships & LLCs: On your IRS Form 1065, make sure to check the box that indicates this is your final return. Use Schedule K-1 to report the P&L given to each partner. This must be completed by the 15th of April the year following the close of your business.
o Sole Proprietors: Unlike the other types of businesses, IRS Schedule C has no “FINAL” box. All you need to do is make sure to file by the 15th of April the year after close of your business.
Eighth Step: Take Care of Loose Ends & Remaining Assets
Once all obligations to taxes, debts, loans and employees, the remaining assets can be distributed amongst the owners. How this is distributed is based upon how the business was setup:
· Corporations: The remaining assets are divided among shareholders in accordance to the number of shares they hold.
· Partnerships & LLCs: If enough money remains, each partner should receive an amount that is equal to the amount of their capital account. IF there isn’t not enough for this, the funds should be distributed in accordance to the size of each of the partner’s separate capital accounts.
· Sole Proprietorship: Anything that is left over would go directly to the sole proprietor.
That’s not all – you’ll need to make sure any other loose ends are also tied up. This could be anything from canceling utilities and licenses to closing inactive accounts and subscriptions.
Still have questions?
Please call us for a free appointment with Miami business attorney Yoel Molina in our Miami office at 305-548-5020.