You might decide to close your business for a number of reasons. Perhaps it is no longer financially feasible, or maybe you are moving on to something else. Regardless of the reason, there are several legal tasks you’ll need to undertake to protect yourself, your credit, and your reputation within the community—especially if you think you might want to have another business someday.
Here are the main steps you’ll need to take in order to shut down your business to protect you and your assets.
Step 1: Voting to Close the Business
If you are the sole owner of your business, you can make the decision to close on your own and skip this step. But if you have business partners, then you’ll have to review your operating agreement or corporate bylaws to determine the vote necessary to dissolve the business. Often, governing documents will require a two-thirds or even unanimous vote. Be sure to record the decision in the form of meeting minutes or with a written consent form.
Step 2: Notify Creditors, Employees, and Customers
Next, you’ll need to make plans for notifying any creditors, employees, and customers that the business will be closing. One caveat: If you have outstanding accounts receivable, try to collect on these before you let anyone know that the doors will be closing. Once you’re out of business, invoices will be that much more difficult to collect on.
Here are some key players you may need to notify:
If you have employees, be sure to make your final payroll tax deposits and file your final employment tax paperwork on time. If you use a payroll service provider, then find out what forms they will handle on behalf of the business and what, if any, steps you need to complete on your own.
If you are selling the business or its assets, discuss the tax implications with the business’s accountant. Get the attorney involved early in any purchase negotiations and drafting the asset purchase agreement.
Take care of other run-of-the-mill business debts, including money owed to suppliers, utilities, service providers, and so forth. Make plans to pay your employees their last paycheck. But because taxes are often a personal liability, regardless of entity type, make sure those get paid first.
Once the known liabilities of the business have been satisfied, then determine whether any funds should be set aside for “contingent liabilities,” i.e. debts that might come up but are presently uncertain. For example, litigation might be predictable if the business is closing without fulfilling all of its contractual obligations. Make plans to address these what-if scenarios. Only after the liabilities are satisfied (both known and contingent) should the remaining funds, if any, be distributed to the owners in accordance with the operating agreement or corporate bylaws.
Step 4: Dissolve the Business With the State and Various Taxing Agencies
Next, you’ll have to officially dissolve the business entity with the Ohio Secretary of State and file final tax forms with various taxing agencies. Dissolving with the Secretary of State puts creditors on notice that the business entity can no longer acquire business debts. And filing your final tax forms lets the taxing agencies know the business will not be filing future tax returns. Otherwise, the taxing agencies may assume that the business simply failed to file required tax returns, which can lead to the assessment of penalties and interest (a personal liability)! The Ohio Department of Taxation (“ODT”) provides detailed information about closing the business tax accounts.
Corporate dissolutions are more complicated than LLC dissolutions. Corporations are required to notify their creditors, giving them time to present claims to the corporation; notify the Bureau of Workers’ Compensation and Department of Job and Family Services; and obtain a Certificate of Tax Clearance from ODT. While the Secretary of State does not require LLCs to take these additional steps before dissolving, to avoid potential personal liability, all of the members of an LLC should still take steps to ensure the LLC’s liabilities have been fully satisfied.
Step 5: Cancel Permits and Licenses Used by the Business Entity
Be sure to cancel to any permits or licenses that were required to operate the business. You don’t want anyone (especially a rogue former business partner or employee) to continue using the permits or licenses without your knowledge after the business closes. Again, this could lead to personal liability for taxes associated with those permits or licenses or even penalties for regulatory violations that you weren’t even aware of. (Note: You don’t need to cancel any personal licenses you might continue using in your profession, just those that are issued to the business entity.)
Ordinarily, it can take months to properly dissolve a business entity. During a global pandemic, many businesses were forced to close their doors quickly. But it’s still necessary to go through the proper steps. Otherwise, you could be plagued by unnecessary headaches in the form of lawsuits and debts for years to come.
If you need assistance with selling business assets or dissolving your business, then please schedule a consultation below.