Whether it's a positive choice (i.e. retirement or the next great adventure) or a series of unfortunate events, what do you do when it's time to dissolve your business?
Just like starting a business, closing one also requires some legal housekeeping. Otherwise, the business owners could be opening themselves up to liability on unresolved creditor claims, unpaid taxes (or penalties for failing to file tax returns)
Develop a plan of action for resolving any outstanding creditor claims. Creditors of the business typically have to be satisfied (or paid back) before the remaining assets can be distributed to the owners of the business. Otherwise, the creditors could file lawsuits against the owners for fraudulent transfers, and the owners could be financially responsible for the outstanding debts. Any employees of the business should also be paid any wages they are owed as well.
Often, when we counsel businesses who are going through the process of dissolving, there are more outstanding debts than there assets. And often, those debts have been personally guaranteed by the owners of the business. Such debts might include SBA loans, business lines of credit, credit cards, and other debts owed to suppliers and vendors. Rather than simply paying off the most demanding of these creditors (or your personal family and friends who might be owed money), we have found it's best to negotiate a global resolution with all creditors, especially where the owners would like to avoid filing for personal bankruptcy and have some assets with which to offer a good faith settlement.
The other major creditor we're often called on to negotiate with is the business's current landlord. Landlords will often threaten to come after business tenants (or the owners of the business) for any remaining rent and other payments due under the lease. However, the landlord also has a duty to mitigate its damages, meaning the landlord typically can't and won't allow the space to remain vacant just to pursue a failed business for unpaid rent. In short, there is usually some room to negotiate if you need to break a commercial lease early, but we must first carefully review the terms of your lease and any personal guarantees.
File Articles of Dissolution with the Ohio Secretary of State. While a relatively simple process for LLCs (and slightly more complicated for corporations), filing the articles of dissolution with the Secretary of State's office officially puts others on notice that the business no longer exists. This means that it can no longer to enter into contracts, incur additional debts, or even be sued. (However, don't just dissolve your LLC to try to avoid a potential lawsuit. You would, more than likely, only be opening yourself up to personal liability.)
If you have business partners (whether LLC members or corporate shareholders), there should also be a written action documenting the decision to dissolve and who has authority to take any next steps, including cancelling any permits or licenses. The specifics are usually detailed in your company's operating agreement or bylaws. If not, there are default provisions in the Ohio Revised Code that will specify how dissolution occurs.
Discuss any necessary tax forms and final accounting issues with your CPA. Employment tax returns must still be filed on time, asset sales may create tax liabilities, and final partnership tax returns must be filed and K-1 Statements issued. Remember, owners of the business can be held personally liable for any unpaid taxes. And corporations must also obtain tax clearances from the Department of Taxation, Bureau of Workers' Compensation, and Ohio Department of Jobs and Family Services (unemployment taxes) before they can be dissolved.
As a general rule, outstanding tax liabilities should be paid before other debts, but determining which debts have priority is a complicated area of law. This is where we work together with your accountant or CPA to make sure you are not creating additional liabilities for yourself.
Whether it's an offer in compromise on an SBA loan or negotiating a settlement agreement and release with other creditors, we can help you figure out your options and execute a plan for an orderly dissolution. To learn more:
The information contained on this website is not legal advice or legal opinion and should not be relied upon. Furthermore, nothing contained in this website is intended to create or establish, and does not constitute, an attorney-client relationship.