Right now is not an easy time for small businesses. Skip’s data shows that nearly half of our small business users are barely surviving the pandemic, and the struggling U.S. economy doesn’t help. If you’re a small business owner considering closing down, you have some big decisions ahead of you. But you’ll find all the answers you need in this post. In this step-by-step guide we are breaking down how to know when it’s time to close, how to dissolve your business legally, how to file for bankruptcy, and all the details you need to take care of before you close your doors for good.
Step 1: Assess Alternatives to Closing Down
Even though your business is struggling, you may not need to shut down permanently. There are alternatives to consider that might help you stay afloat. Here are some other options besides closure:
- Apply for a government loan, such as an EIDL loan, to pay your expenses temporarily. At Skip we have a free self-reporting tracker you can use for EIDL loans.
- Apply for a grant program, like this one for women- and minority- owned businesses, and get money to keep your business running that you won’t have to pay back.
- Consider whether another business might acquire you. Sometimes, businesses in the same industry will buy out smaller businesses in order to expand their reach. Look for a broker or consultant to help you sell, and see whether you could stay actively involved in the business after you sell if you’d like to.
- File for Chapter 11 Bankruptcy. This type of bankruptcy allows for businesses to restructure their debts, rather than liquidating their assets, and is designed to help keep businesses afloat during temporary revenue losses. We will dive further into bankruptcy options later in this post.
Step 2: File Articles of Dissolution
Even with grants and loans, you may decide it's time to close. If your business remains financially solvent and you don’t need to file for bankruptcy, but would like to close down, you will need to officially file articles of dissolution—the paperwork to make your business entity nonexistent. These are the opposite of the forms that you file to create your business.
Articles of dissolution are managed by individual states, so requirements vary, but most states require you to provide the legal name of your business, the date it will be dissolved, and a statement from the owners of the company that they agreed together to close the business. Some states, such as Florida, allow for articles of dissolution to be filed online, but most require them to be mailed.
You may want to consult a lawyer for the dissolution process to make sure you have all the information you need. Once your articles of dissolution is reviewed and you file your final taxes, you will get a notice of dissolution that informs you that your business has officially ceased to exist. If you are filing for bankruptcy, the dissolution process is a bit different—read on to find out.
Step 3: Inform Employees and Pay for Hours Worked
After you decide to close your business, you should inform your employees and make a plan for how to support them as you shut down. As difficult as it is for you as a small business owner to lose your business, it’s equally difficult for your employees to be losing their jobs.
It is your responsibility as an employer to pay your employees for any wages that they are owed, and provide them with information about filing for unemployment. Do your best to provide leadership to your employees through the transition of closing your business.
Step 4: Pay Off Taxes
Your financial priority before you close your doors should be to take care of any taxes you owe. Unfortunately, whether or not your business is open you still need to pay off your remaining taxes to the IRS, even if you go bankrupt. In most states, you will not be able to dissolve your business legally until your taxes are paid, so you won’t receive notification that your dissolution was accepted until you file your taxes. Check with your state's tax information website to be sure.
Pay off taxes before you pay off other outstanding debts—it is easier to work out payment plans with creditors than the IRS. Unfortunately, the IRS has the power to seize personal and business assets if you fail to pay your taxes.
Step 5: Pay Off Other Outstanding Debts and Bills
The next step after paying your taxes is to work out a payment plan for other outstanding costs, like utility bills, payments to vendors, rent and credit card bills. Let all your creditors know you are closing down your business so that they can send you final bills and notices. If you are renting space and closing your business before the termination of your lease, your landlord may hold you liable for rent for the rest of the year.
If you can’t afford to pay off these final costs, you may be able to work out a payment plan with creditors—many credit card companies and landlords offer forbearance and relief programs. As a last resort, you can file for bankruptcy.
Step 6: File for Bankruptcy If Necessary
If you can’t pay off your debts, you may choose to file for bankruptcy. Although bankruptcy isn’t ideal, it won’t stop you from being able to run a successful business in the future. If you are registered as an LLC, business bankruptcy shouldn’t impact your personal credit. There are two main types of business bankruptcies for you to consider. Here are your choices:
- Chapter 7 Bankruptcy: Chapter 7 bankruptcy is often called “liquidation bankruptcy”. If you file for Chapter 7, a trustee will be appointed to sell off your remaining assets to pay your debts and outstanding taxes. Your business will be closed completely and permanently. Once your bankruptcy process is complete, you’ll receive an “order of discharge” which officially dissolves your business. But you will still need to file articles of dissolution with the state.
- Chapter 11 Bankruptcy: Chapter 11 Bankruptcy allows your business to continue operating and reorganizes your debts. It gives you more time to pay off your debts and emerge as a financially healthy business. If you think there’s a chance your business could become profitable again soon, and you’d like to be able to continue operating, Chapter 11 would be a good option for you. The CARES Act made it easier for small businesses with less than $7.5 million in assets to file for Chapter 11 Bankruptcy. If you file for Chapter 11 and are unable to reach financial solvency, you may need to file for Chapter 7 and dissolve your business.
Conclusion: Don’t Be Discouraged
If you are thinking about closing down your business, you are probably feeling quite disappointed. But there may be options, like grants or even Chapter 11 bankruptcy, to help you keep your business open. If you’re unable to stay open, follow our step by step guide to dissolving your business so you will be able to move on without tax liability, outstanding debts or disgruntled former employees. Whatever you decide is best for your business, we hope you will follow along with our blog to get the latest information about personal finance, business, and government services.