Providing Notice That You’re Going Out of Business
Closing a business with debts can be daunting. If you’ve decided that you want to, or need to, close your business, giving notice is a major step in the process. While it’s hard to break the news, it’s even harder to lose your business assets in the winddown process. That’s why a strategy is necessary for closing a business with debts. It will need to carefully consider how and when to give notice, and to prioritize who needs to know about your business closure. Below is a non-exhaustive list of the noticing considerations that should be considered when closing your business, along with some of the pitfalls that come with this part of the winddown process. These pitfalls apply not only to your business, but may also apply, in some instances, to you individually as your business’ representative.
Employees. When closing a business with debts, if your business has employees, you’ll want to give them as much advance notice as possible. You may want to advise some of your more senior employees before advising the balance of your staff. However, in any instance, it’s important for your business to ensure that your employees are paid and any benefits such as insurances remain in place pending the winddown. State law generally requires that employers pay their employees their final paychecks within a short period of time of closing business. Moreover, paying your employees is important to your personal reputation, especially if you intend on opening more businesses in the future.
Banks and Lenders. If you have open accounts with banks and lenders, and you put these institutions on notice of your business closure, they’re likely going to take action to close your accounts and cancel your lines of credit. As closing a business with debts is complex, if you have outstanding balances due to these institutions, they may even take action to offset what’s owed against any money on deposit. Accordingly, it’s important that, before you give notice to these institutions, that you properly consider the rights of these institutions to hold onto your business’ accounts. These institutions, in some instances, may consider your notice to be a technical “default” under your loan documents, which may prompt them to bring a lawsuit against you to collect any outstanding debt, interest, fees and other costs that your business may owe them under contract. Another important consideration is whether you have any personal guarantees on those accounts, as you may find yourself being sued along with your business. To this point, it’s important to carefully review your business’ loan documents to spot any personal liability that you may have on a given business debt.
Landlords and Storage Units. Notifying your business’ landlord presents its own set of challenges. If you still have months or years left on your business lease, or in a storage unit, your business may find itself liable to the landlord for all of those months of rent. In closing a business with debts, your business’ landlord may have an obligation to mitigate its damages by re-renting the property. Hopefully your business’ landlord is understanding and is in a position to release your business from any liability. Your business may permit the landlord to use any security deposit to pay part of the outstanding rent. However, if your business is unable to reach an agreement with the landlord, it may find itself a defendant in a landlord tenant action. Your business’ landlord may even attempt to place a lien on all business property inside the premises. Even worse, if you signed a personal guarantee on a lease or storage unit, you may also find yourself being sued along with your business for the outstanding rent.
Vendors and Service Providers. The people and businesses that provide your business with goods and services should be at the top of your list. In the process of closing a business with debts, they should be made aware that you will no longer need their products or services so that you can stop incurring further debt with these people and businesses. It’s also fair and equitable to allow them to plan accordingly. You should consider how to address your return of any goods on hand that will no longer be used by your business. Of course, they’ll also want to know when, if ever, your business will have the ability to pay their outstanding invoices. To that point, it’s very important to note that some vendors may take immediate action in response to your notice, including attempting to reclaim their goods, closing any open line of credit, and requiring all future orders to be “COD”, or cash on delivery.
Customers and Accounts Receivable. If your business is owed money by other people and businesses, you’ll want to realize those funds so that can be used to wind down the business. Further, if your business is engaged in ongoing projects with customers, or holding any deposits or pre-paid orders, it is crucial that you devise a strategy to use any receivables to make those customers whole. Alternatively, you will want to arrange for another business to take over those accounts. While it may be expensive to finish out those customer obligations, litigation may commence if you do not devise a strategy to resolve those issues in advance of closing your business’ doors.
Closing a Business with Debts – Resolving Outstanding Debt and Tax Liabilities
Taxes and debt are a fact of life for both people and businesses. If you’re closing a business with debts, chances are you’ll have to resolve at least some outstanding state and federal taxes, as well as at least some outstanding debt. Below is a non-exhaustive list of some of the tax and debt issues that you may have to resolve while winding down your business.
Sales and Payroll Tax. Some businesses collect taxes that are actually held in trust for the taxing authority. That’s the case with sales tax, which is assessed in connection with goods sold by your business. Failure to pay sales tax can result in serious penalties for both your business as well as you individually as the business’ owner. Accordingly, first and foremost, you’ll want to employ an accountant or tax attorney to ensure that you’re up to date on any sales tax and, if you do owe sales tax, to assist you with resolving any individual liability you may have on those taxes. If your business has employees, then your business is likely to owe payroll tax in connection with employee wages. Once again, you’ll want the assistance of an accountant or tax attorney here, as the federal and state taxing authorities can hold you liable for these kinds of taxes as well. Finally, your business will need to file a final tax return with the state and federal agencies through the date of closure.
Bulk Sales. If your business is selling its assets and inventory, you should closely consider the issue of bulk sales law, which may require that you give notice of those sales to your business’ creditors.
Unsecured Debts. Most businesses will have some standard debt due at the time of its closure, such as internet and phone bills, credit card debt, overdraft fees, and the like. While closing a business with debts, if your business does not have the cash available to resolve these outstanding debts, you will need to contact these creditors to attempt a resolution of each account. You will again here need to consider whether you have any personal liability on these accounts, and prioritize accordingly to increase your chances of winding down your business with the least amount of debt trailing you.
Secured Debts. Some debts, like auto loans, are secured against specific property. If your business has secured debts, it may need to return the property to the secured creditor. Alternatively, the secured creditor may repossess that property, sell it at auction, and seek to have your business pay for the difference between the value of the property and the outstanding secured debt.
Dissolving Your Entity With State and Local Government Offices
Unless you’re operating as a sole proprietorship or a partnership, your business will likely have been operating under a separate “entity.” This can be a limited liability company or a corporation. In either instance, in closing a business with debts, that “entity” will have to be formally dissolved in order to really wrap up the business. This process generally requires filing documents with the state in which your business was formed and requires disclosure of your business debt, assets, and confirmation that all owners of the business agree with dissolution. Some states require proof that your business no longer owes any taxes or other certain debts. During the process of closing a business with debts, you’ll want to review any governing documents that you have available, such as the articles of incorporation, and follow the procedure stated in that document to ensure that you are winding down your business with the proper corporate authority. You’ll also want to consider filing appropriate documents in connection with any licenses, permits, or trade names used by your business.
Assignment as an Alternative to Closing a Business with Debts
As you can see, closing a business with debts and winding it down is not a simple process. This is why may business owners use an assignment for the benefit of creditors (ABC) instead of winding down their business on their own. In an ABC, a person is responsible for winding down your business, and hires accountants, auctioneers, and attorneys to assist them with that process. In exchange for assigning your business and its assets to that person, called an “assignee”, your business will be wound down through a state court-supervised process. The assignee receives commission for any assets recovered and liquidated through the process. However, even if there appear to be no assets owned by the business, assignees will generally agree to wind down the business.
Closing a Business with Debts alongside Middlebrooks Shapiro
Closing a business with debts can be a complex, confusing process. However you decide to wind down your business, you should speak with an experienced attorney. At Middlebrooks Shapiro, we understand all aspects of winding down a business. We specialize in bankruptcy, ABCs, and other bankruptcy alternatives. If you are struggling in closing a business with debts, book a consultation with our team. We will talk you through your business’ options and explain the processes and procedures available to you, including the wind down process so that you can make the best choice for your business.