Shutting down a business involves more than just closing up shop and selling off inventory. Business owners have a legal responsibility to pay off creditors before any of the business assets can be distributed to owners. If the owners neglect to follow the correct procedures to dissolve the business, they can be held personally responsible for business debts for years into the future.
State Law Establishes Procedure
Every state has its own business code that allows people to form and operate different types of businesses within the state, such as corporations and limited liability companies. The laws for each type of business contain instructions for closing down the business and winding up its affairs. The only way that a business owner can ensure that his or her business obligations end on the day the doors close is to follow the state instructions for a particular type of business.
Owners Must Agree to Dissolve
State law often requires the owners of any type of business to agree to shut it down. Typically, the law requires a majority vote of the owners. Some states require a two-thirds majority or a unanimous decision for some types of businesses. The vote to dissolve should be properly recorded in the company's records, and a person should be appointed to pay bills, liquidate assets, and close accounts.
Creditors Must Be Paid First
Dissolving businesses must pay off their creditors first, to the extent possible, before distributing any excess assets to owners. The law also requires the business to set aside enough money to pay unresolved debts that may come due after it has closed its doors. Most states allow a business to publish a notice in a local paper, requesting anyone who has a claim against the company to come forward by a specific date. In some states, proper notification can prevent creditors from suing the company after a certain number of years have passed. In other states, following the notification procedures limits claims to any excess assets that were distributed to owners.
Cancel State Registration
Independent business entities that had to file formation paperwork with a state business registration office to begin operations, such as corporations and LLCs, must also file paperwork to dissolve. The paperwork is typically called articles of dissolution or a certificate of dissolution. Filing dissolution paperwork makes the exact date that the business closed down part of the public record.
Cancel State Licenses
Any state or local business licenses or permits need to be canceled. If your business uses an assumed business name, contact the registration office to cancel it. File any required final reports and returns with the state and federal governments, including annual reports and tax returns.
A Business Lawyer Can Help
The law surrounding dissolving a business is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact a business lawyer.