What we're talking about
You might decide to wind down your business for a number of reasons – whether you've exhausted all possibilities of making it profitable (or sellable), lack the capacity or just want to do something else with your life. This guide is about closing your business out of your choice, rather than it being forced upon you. It's about taking care of the legal and financial details, managing stakeholder relationships and turning whatever assets you have into cash.
Winding down can typically take at least two to three months because it's a multi-step process – one that'll vary depending on your business structure and where you're operating from. This guide is broadly aimed at US businesses – if you're in the UK, here's a great starting point.
Why it's important
Formulating a bespoke plan for your business before you officially cease operations is absolutely critical. From a legal point of view, failure to follow the correct process can mean continued liability for taxes or payments far into the future. That could mean debts and even lawsuits. From a financial point of view, you need to make as much cash as you can from your assets (think inventory, property and machinery).
On a more human level, you can risk personal relationships, business relationships and your standing in the community if you don't do this right. Given the rate of business closures per year – data from the US Bureau of Labor Statistics show that around 45% of businesses fail during the first five years – this is something that most business owners need to be aware of.
Things to note
Seek out expert help. Each situation will require different legal, financial and stakeholder considerations. Though it may be possible to work through this on your own, in many cases seeking out expert advice – in the shape of a small-business lawyer and accountant – is definitely recommended. For example, a tax accountant can help guide you through things like filing payroll taxes and a lawyer can help with the documentation that you'll need to complete – and thus avoid any costly mistakes.
There's paperwork involved. One of the key steps of winding down a business is what's known as dissolving the legal entity of your business – where you file the necessary documents that show that the owner (or owners) of the business agree to cease operations. This ensures that you're not liable for business taxes or incurring any more debts. This part comes after all the other winding-down activities are complete and it varies from state to state – each has a slightly different process and documents that you need to file, which is why seeking specialist advice is key, particularly if you're operating across state borders.
Timing is everything. With so many moving parts to the winding-down process – and elements like labor laws and filing taxes at play – when you take action is really important. You'll need to arm yourself with all the necessary information and laws relevant to your business and carefully plot out your timeline to make sure you leave smoothly (and don't break any laws!). While the guide below lists actions in an order, it might not necessarily be the order that's right for you.
How – and when – you tell stakeholders is vital. Depending on your business, you could have a lot of different interested parties: suppliers, lenders, landlords, employees, customers and other businesses. Without a solid and coherent plan, these stakeholders may get very jumpy when you announce that you're winding down. Banks could call in their loans, suppliers may accelerate credit terms and employees may quit – leaving you without key personnel. Depending on the type of business, a good, orderly wind-down could take a year.
Make a plan for debts and debtors. It's worth noting that just because you're winding down, it doesn't mean people don't have to pay you.So, if you're owed money from debtors, you'll probably need to bring in a collection strategy before you let them know. On the flip side, if you owe money to lenders or to the bank, you need to make sure that you're clear on what you owe and how you're going to pay it back.
How to wind down your business
1. Exhaust all other possibilities first. The best – and easiest – option for business owners who can't make their business work is to sell it to someone who can. So, before starting the winding-down process, be confident that the option to sell the business is off the table.
2. Reach an agreement with the necessary people. If you're a sole proprietor (a business owned and run by just one person), the only person who needs to agree is you. But, if you're a corporation, a partnership or a limited liability company (LLC), you'll have procedures to follow as outlined in your organizational documents, and you'll also have to follow your state's requirements. Usually, all or the majority of a business' owners need to officially agree to close the business – and it needs to be recorded.
3. Understand what your dissolution process is. Even though you'll likely not file your documents – especially your final tax returns – until after completing the other steps in this guide, you need to find out what your state demands from you early on. These so-called ‘articles of dissolution’ basically set out the nitty-gritty details of the business. You can also take out insurance to protect against any claims made after the company has been dissolved.
4. Make sure that you comply with any labor laws. It's not easy to keep people in a company once they're aware that it's about to close its doors. Make sure you're following the appropriate law in your state in terms of severance pay and employee payment after closing – and that you have sufficient funds set aside to make these payments. Read the small print and get a lawyer involved if you need to.
5. Notify your stakeholders. Be strategic about how – and when – you inform your key stakeholders, but also be clear about how this will and won't impact them. These conversations will often revolve around how you'll be paying them and on what schedule, so prepare for that in advance. Lenders will want to know that you have a plan for paying them back, and suppliers will want to know when the last order will be.
6. Cancel any permits and licenses. This is important because you don't want another business or individual to come along and use, for instance, your seller's permit and business name. That would make you responsible for financial penalties and taxes, even when your business is no longer officially operating.
7. Liquidate your assets. An important part of the winding-down process is turning any assets you have into cash – this is extremely useful for paying creditors, tax and employee salaries. This might involve selling your products at a discount, selling off machinery and equipment or an office clearance sale. Some companies specialize in this service.
8. Close any business accounts. Go through systematically and cancel all of the subscriptions and accounts that you have with your various service providers. That includes business credit cards and bank accounts, too.
9. Pay your outstanding taxes. An accountant may very well be necessary at this point. This is about taking care of any taxes you need to pay the Internal Revenue Service (IRS) – whether that's employee-related taxes, income taxes, sales taxes or asset sales. Luckily, the IRS has a business closing checklist you can consult.
10. Pay your creditors. Make sure you've agreed on a set plan with any outstanding creditors – including employees' final paychecks. You might also have been asked to sign a personal guarantee, which holds you as the business owner accountable for any outstanding debt owed to banks and other creditors. With the help of an accountant, create a list of priorities and ask for a confirmation letter from those creditors when your balance is paid up in full.
11. Outline a way for people to contact you. Even when the business is wound down and officially closed, there still needs to be a clear way for stakeholders to get in touch with you. There might be other creditors that you've forgotten about or employees who need references. Remember, you don't want to burn bridges. Look to maintain those relationships and end things on a positive note.
• How and when you communicate with your key stakeholders is a huge part of the puzzle for ensuring a seamless transition and not ruining relationships.
• Due to the numerous steps involved, winding down can take a few months – you'll need to create a considered timeline of when to do what.
• Involving legal and accountancy expertise is highly recommended to make sure that you're not breaking any laws and handle your finances properly.
Example. In this illustrative article in Harvard Business Review magazine, Andre Blickstein digs into how he closed his business gracefully after 16 years of operation. This is also a great read on that same topic from the team at venture capital firm Homebrew.
Perspective. If you're considering winding down but aren't sure if it's the best course of action, this blog post on business advice site SCORE gives three key considerations.