If you have decided to close your business, it is important to understand that it involves more than hanging out a “closed” sign and selling off your inventory. Business owners have a legal duty to pay the entity’s creditors before any of the business assets can be distributed to the owners. Failure to follow the proper procedures in dissolving a business can result in the owners being held personally liable for the business debts.
Each state has established its own business code that sets forth how individuals can form and operate different types of businesses within its borders. Each type of business has certain procedures that must be followed when shutting down and winding up its affairs. Owners must follow these procedures in order to protect against personal liability and to ensure all business obligations end on the day the entity is officially closed for business.
State laws typically require a majority vote of the owners to close down a business. The vote to dissolve should be properly recorded in the entity’s records and should appoint an individual to pay creditors, sell assets, and close accounts.
If possible, a dissolving business must pay all of its creditors before any of the remainder can be distributed to the owners. Additionally, the law requires the entity to set aside an adequate amount of money to pay any unresolved debts. Most dissolutions laws provide that the business can publish notice in a local newspaper and establish a deadline for claims to be submitted. Proper notification in some states can prevent creditors from filing lawsuits against the business after a certain number of years, while other states provide that the notice serves to limit claims to any remaining assets that were distributed to the owners.
Your business must also file the appropriate paperwork in the same state registration office where the formation document was filed. This is commonly referred to as filing an article of dissolution or a certificate of dissolution, which establishes the date that the business closed down as part of the public record.
A dissolving business must cancel any licenses or permits that it has been using. Annual reports and tax returns should be filed, as well as any other final reports that may be required by state or federal agencies.
Dissolving your business can be complicated and it is important that it is done correctly. The above is a simplified outline of some of the factors that must be considered, but every case is unique. For more detailed information on how to properly dissolve your business, contact Leslie S. Marell today.