Wind Up: Closing your Business

During tough times, many business owners decide to wind up their existing business to move onto other opportunities rather than keep operating a business at a loss. Some reasons for closing or winding up a business may include, but are not exclusive to, the following:

• decisions to close down and retire;
• the business debt rises to a level where the company cannot recover;
• the current business plan or model is flawed;
• the decision of the business partners to go their separate ways; and
• Unforeseen events, such as the financial impact of COVID-19.

Winding up a business is the process of closing a business. Here are some very general steps in the process of winding up, it is always best to seek advice specific to your business and situation when going through the Wind Up process from a CPA and an attorney with bankruptcy and workout experience.

STEP #1: MAKE THE DECISION TO WIND UP. Depending on the structure of your business, partnership, limited liability company, or corporation, the procedures may be different. The procedures for a Wind Up determination are contained in your operating agreement, bylaws, or partnership agreement. In the state of Florida, limited liability companies are not required to have operating agreements, so the default dissolution triggers are included in the Revised LLC Act. See Fla. Stat. 605.0701.  Florida Corporations without bylaws will be governed by the default provisions include in the Florida Business Corporations Act. 

STEP #2: GET A BALANCE SHEET TOGETHER OF ALL THE BUSINESS’ ASSETS AND LIABILITIES. A balance sheet is a detail of the equity in the business based on the current assets when weighed with the debts and obligations owed by the business. A balance sheet in QuickBooks is generally very basic and will not include liabilities that will be triggered based on the business ceasing operations and defaulting on leases and other executory contracts. To formulate a plan, the owners, members, shareholders, or partners should collect detailed information to complete a balance sheet that has a more comprehensive view of the assets and obligations of the business.

LIABILITIES:

The business will need to collect the following information for each of the business’ debts/obligations: (i) the company name, address, and contact information for each creditor, (ii) latest statement reflecting the amount owed, (iii) any communications or agreements with the creditor, (iv) information about any collateral or guarantees attached to the  liability, and (v) the contract the governs the relationship of the business and creditor. This detailed information is important for assessing the total amount of the business’ debt, if there are debts where there is room for negotiation, and if the debt will follow any of the owners, shareholders, or partners after the business is closed. Creditors may include employees who are owed wages or benefits, vendors, landlords, SBA, lines of credit, credit cards, and equipment or vehicle lenders.

ASSETS:

A business will also need to get a detailed list of assets, the estimated value upon liquidation, and the costs associated with getting funds from the assets. The assets list usually will encompass inventory, accounts receivable, equipment, materials, vehicles, bank accounts, and real property.
The value of the assets will be what is available to pay the outstanding obligations to employees, accounting and reporting costs, and to negotiate with creditors. Any saleable assets will need to be sold as efficiently as possible to pay the Wind Up costs and provide for the debts of the business.

STEP #3: FORMULATE A TO DO LIST AND TIMELINE THAT IS CUSTOM TO YOUR BUSINESS. The timeline may include the following:

1. What is the estimated last day of operations?
2. What notice is required to be given to the business’ landlord?
3. When should the employees be notified? When will the last day for employees?
4. Reaching out to the accountant to get the items that the accountant needs for final payroll and withholding tax payments, payment of any outstanding unemployment and sales tax, and any other federal, state, or local taxes owed.
5. Getting packages ready for employees to notify them of their options for unemployment, continuation of any benefits, etc.
6. When and how should customers, vendors, and business partners be notified?
7. Arrange for utilities to send final bills.
8. Cancel insurance policies and advise of the last day of operations.

STEP #4: PAYMENT TO CREDITORS AND VENDORS. Determining what and which creditors to pay may be the hardest part since there is often not enough capital or assets to pay all the debts owed. An attorney with workout experience can provide the valuable service of making contact with each creditor to negotiate reduced payment in place of lawsuits or bankruptcy. The attorney can make sure any agreements, settlements, and releases are properly documented to avoid future litigation over validity in resolving the dispute. Negotiations with creditors are especially important when there are personal guarantees attached to business debts. It is imperative not to wait until there is absolutely nothing left to negotiate with.

STEP #5: FORMAL DISSOLUTION AND LAST RETURNS. The business’ accountant will file the final tax return, indicating that it is the final federal tax filing for the business. The business, or accountant, can then close the business’ EIN account with the Internal Revenue Service.  The business should notify any applicable Florida and local licensing agencies, the Department of Revenue, and the Division of Corporations of the dissolution and that the business is ceasing operations.

Disclaimer: The information in this blog post (“post”) is provided for general informational purposes only and may not reflect the current law in your jurisdiction or the jurisdiction applicable to your issue/matter. No information contained in this post should be construed as legal advice from Roberts Law, PLLC or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this Post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction.