All good things…must come to an end, they say.Sadly—and more often than not—endings include startup companies. Less than half of new businesses survive their first five years. Entrepreneurs would be wise to keep on hand guidance for what must be done in the event of a business closing.

The Internal Revenue Service provides a checklist for closing a business. State and local government tax offices will also post requirements for closing a business, which may include small details such as filing with the local government an application for a “going out of business sale” permit. Check federal, state, and municipal requirements to avoid paying unnecessary penalties.

Among the state requirements will be to file Articles of Dissolution with the Secretary of State’s office. Each state has its own requirements; however, an example from my own state, Tennessee, is illustrative:. As part of the state filing, a written consent to dissolve the business from the shareholders or member-owners of the company will be required. Bylaws of a corporation or the LLC Operating Agreement typically outline the dissolution process, needed approvals, and required documentation.

Some states require filing Articles of Dissolution before notifying the business’ creditors, others require filing documents after creditors’ claims are resolved. In any event, all of a company’s creditors must be notified by mail when a business is closing. Notice to creditors must explain that your business has or will file for dissolution. Creditors must be provided:

  • A mailing address to which creditors must send their claims.
  • The deadline for submitting claims.
  • A list of information that should be included with creditors’ claims.
  • Notice of the company’s rights if claims are not received by the deadline.

Some states require notice of dissolution to be placed in the local newspaper. Again, check the regulations where your company is registered. Companies facing dissolution will want to have collected outstanding receivables before notifying customers or creditors that the company is going out of business. Once the notification process has started, a company should consider how best to sell remaining assets and inventory in order to meet tax obligations and creditors’ demands. Companies liquidating merchandise and equipment may be required by state law to provide a certain number of days’ advance notice to creditors, and companies that are obligated to file for bankruptcy protection would be advised to consult with an attorney as to how to proceed.

Once public notice is given that a company is going out of business, details such as informing customers as to how the firm intends to deal with remaining contractual obligations; giving notice to landlords; cancelling utilities, bank and credit accounts, and subscriptions must be taken care of on a schedule.

Of course, there’s one more big concern when closing a business: how to properly let go of employees. There may be contractual commitments that need to be met when downsizing or closing a business. Making arrangement for employees regarding insurance coverage such as continuation under COBRA and filing for state unemployment insurance requires preparation. Arranging for the return of company property in the possession of employees who are about to lose their jobs is sometimes an overlooked detail. In certain cases, a company must give up to 60 days’ advance notice of business downsizing, sale, or closing to employees in accordance with federal law titled “The Worker Adjustment and Retraining Notification Act (WARN).” Some states, such as California, Illinois, New Jersey and New York have their own versions of the WARN Act, and the amount of notice required by state law may vary from what is required by the federal act. Often, a company’s benefit administrator or payroll provider will have available model documents that companies can use to provide appropriate notification to employees.

Lastly—and this may be the toughest chore—entrepreneurs should take time after a business has closed to assess what went wrong, and write (at least as a diary entry to themselves) a brutally honest post-mortem. Too often, entrepreneurs feel compelled to maintain a façade: They create a narrative for why their business model didn’t succeed that looks to blame outside factors for the failure. The “fail fast” mantra, as one author has observed, too easily lets entrepreneurs off the hook for their own bad behavior. There’s a world of difference between wallowing in self-pity over the loss of a business and forcing one’s self to make a cold, hard appraisal of whatever went wrong. If your business fails, you owe it to yourself: You earned your mistakes—make every effort to learn from them so that the next time you won’t need to experience the same hard lessons over again!

The implication here should be clear. If your portfolio company is put into bankruptcy or elects to wind up its operations, make sure you have them document the steps they have take to do so. From a tax perspective, you will want to write-off the maximum amount of your investment, which is only possible if the company has followed these steps and provided you proof of the dissolution or you liquidate the investment to a third party. Please consult your tax advisor for recommendations on how to treat these issues on your personal taxes.

One last note, you should be monitoring your portfolio companies closely. The last thing an investor wants to find out is the entire management team has resigned in the night rather than suffer through a wind-down, and you are left having to do so. Make no mistake, if the team walks away, you will be stuck with the task. Ignorance is not bliss in this business.

For more information on winding down a company, please see:

This is published under the Appalachian Regional Commission POWER Grant, PW-1835-M.

Copyright Appalachian Investors Alliance, Inc. 2018
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