Following the coronavirus (COVID-19) outbreak, many small businesses are making the difficult decision to close up shop. Legally closing a business, also known as dissolution, involves a number of steps to wrap up your affairs and to notify the government. However, you may have other options short of dissolution to keep your business afloat through the outbreak.
First, consider whether a full dissolution of your business is the best decision. The current financial reality will change, and you may want to have a functioning business once the economy bounces back. Make sure you have explored all of the financial resources available to pay your expenses for the short-term. Beware that some of the money available through government programs must be repaid if you lay off employees, so be careful about cutting costs and closing your business if you receive funds. Consider other ways to cut expenses, increase revenue, and adapt your business to the current reality.
Completely closing your business means that you may have to completely liquidate all business assets and file paperwork to legally dissolve the company. After the outbreak, if you want to continue, you will have to start from scratch in terms of forming the legal entity and acquiring assets for the enterprise.
Instead of dissolving your business, you may temporarily close your doors to save on operating expenses until the crisis passes and you can open up again. To cut expenses during a temporary closure, you may reduce staffing, cut your advertising budget, save on utilities, and cancel supply orders. If your business has signed a lease or any other contracts with vendors, talk with those parties to see if you can negotiate new terms or reduced payments. In some cases, the coronavirus outbreak may be grounds to break the contract.
If you decide to close temporarily, be sure to update your customers to let them know it is only a temporary closure. Stay in contact with your customers through your social media pages, website, and any online business directory listings.
If you decide to dissolve the business, the next step will depend on your business structure. A sole proprietor can close up shop without consulting anyone else, while other business entities typically require agreement among the owners. For LLCs and limited partnerships, look to your operating agreement to determine the process for closing. For corporations, you likely need approval from your board of directors. Most businesses should document the formal agreement by drafting a resolution of dissolution, which will specify the plan for dissolution and the agreement to end the business.
Let your employees know that you are closing your business, ensuring that you give them notice and their final paycheck within the timeframe required by law. Large companies typically have to provide at least 60 days' notice before a mass layoff. However, this rule has been temporarily suspended in many states due to COVID-19.
Before you can dissolve your business, you must settle the company's finances. In light of the COVID-19 outbreak, understand that many contracts and financial obligations are being renegotiated. Be open and honest with your customers and contractors and offer discounts and settlements when possible. The financial affairs you should attend to include:
Note that if you have substantial business debt, you may want to explore bankruptcy. Reach out to a bankruptcy attorney to navigate this situation.
If you have a legally formed business entity, such as an LLC or a corporation, you must file dissolution paperwork with the state. This involves filing a document that specifies the last date of business, the reason for dissolution, and a signature or statement that it was approved by the owners or shareholders. Some states may also require you to first obtain a tax clearance from the state tax agency to verify that you have satisfied all tax debt.
In addition to dissolution filings, you may have other paperwork to submit to other agencies. For instance, if your business had particular licenses or permits, you may need to cancel those with the appropriate state and county agencies.
File your final tax returns with the state and federal agencies. The timing and the type of return you file will depend on your business operations and the entity type. Be sure to also file final payroll tax returns, issue final W-2s to employees, and 1099-MISC forms to independent contractors.
If any assets remain, distribute them among the owners. However, it is important not to distribute anything until you are sure all debts and taxes of the business are fully paid. How you distribute will depend on the type of entity and the number of owners. For LLCs and limited partnerships, distributions will be made according to your operating agreement.