What to do when it’s time to close up shop: Important Tips for Business Owners
By Steven R. Neuner,
New Jersey and Pennsylvania attorney at law
Let’s face it, sometimes a business owner cannot afford to continue, and faces the task of shutting the business down. This is not as simple as it sounds, and there are traps for the unwary.
This article will outline some of the more common issues and problems. However, each situation is different. This article is generalized and probably does not include all the problem areas or issues for any business owner. This article is only a start. See an attorney for specific advice tailored to your situation and your state.
Closing a small business
Let’s start with the “DO’s”:
- File all sales, use, or payroll tax returns or tax filings, and pay as much of these taxes as possible. These are the tax obligations for which business owners are generally personally liable. (There are some exceptions and special rules but that is a subject to discuss with your attorney or tax adviser).
- Compile and backup up or move offsite all the important business and financial records. Too often, we see business owners who let important records fall into the hands of a landlord, or simply get lost. These records are important and necessary to file tax returns. They may be important for the individual business owner later. For many small businesses, operated as Limited Liability Companies or subchapter S corporations, tax losses may need to be documented, and those losses pass through to the business owners. We recommend at least 6 years of tax returns, and bank statements, ledgers, or other similar books and records, and three years of employment records. If you have a computer with all the financial records on it, move that to a secure offsite location, or do a backup. And don’t forget to take the disks with critical software, and passwords etc with you.
- Sell or collect what you can before you close the doors. It is much easier to collect money owed when the customer thinks you are still an ongoing business. Pull together all the records on open accounts and get on the phone to collect. If need be, hire a collection agency or collection attorney. Make sure you pull and secure all the records supporting any claim for money owed.
- Develop and write down a plan with a timeline and a definite “go dark” date. You should have a plan which includes a date by which you will simply close the doors. Your attorney or accountant can help with this plan. The plan should include target dates and separate sections for each of the important tasks to be completed.
- Finish up existing projects if you can do so profitably. Look at all open projects, and compare the cost to complete them against the balance you will be paid if and when the project is completed. If any of them can be finished at a profit going forward within the target timeline you have established, you should complete them. This is especially so if you are substantially into the project. However, beware of customers who have been payment problems or will not pay you when the job is done. Insist on payment when due.
- Keep things on the straight and narrow. When a business is failing, the management and business owners have a “fiduciary” or “trustee” duty not to operate in a way that harms creditors. So keep good records of what you are doing. Don’t engage in lying to customers or creditors; if asked a question you do not want to answer, just don’t answer. How to handle these details is something that you should discuss with qualified and experienced legal counsel. We often suggest that the owners start keeping a notebook with a daily log of all activities and conversations. But each case is different.
- Be prepared to account for all money collected for or received by the business. Usually this means depositing it into a business bank account, and keeping an accurate and current checkbook or ledger.
- Pay or hire a qualified accountant and attorney. Their assistance will be invaluable. How much you need them to do may vary, but you want them available. Bring past due balances current if possible, and be prepared to advance a deposit for future services.
- Work with your key creditors, such as banks and unions, if possible. However, be very careful when dealing with them, not to make false statements or promise more than you can deliver. Telling them you are going out of business is usually not a good idea.
Here are some things NOT TO DO.
- Don’t skip paying salary, including your own. In New Jersey and some other states, the Department of Labor will pursue the business owners who stiff employees. Just as importantly, if you are working to close down the business, you deserve to be paid a reasonable salary for the work you are doing, if the money is there. What this might be, or how you implement it is a subject for discussion with your attorney. Just make sure that the amount is reasonable and defensible.
- Don’t “steal” valuable assets from the business. If there is something of value in the business, whoever takes or makes use of it should pay for it, and that money should go into a bank account for the “selling” business with full documentation.. Not doing this risks possible future claims by creditors that the “buyer” engaged in a “fraudulent transfer”. Or you can end up providing avenues for business creditors to come after you personally, or come after a new business you might set up.
- Don’t mix the business and personal. Keep your personal expenses and finances strictly separate from the business, or you risk being tagged with personal liability for the business debts under one of a variety of legal theories.
- Don’t set up a new business using the old business assets, customers etc. This follows from what is said above. Any time a new business continues the same line of business as a defunct business, something called “successor liability” comes into play. The less the new business is connected to the old one, the less the risk. Using the same employees, selling the same products or services, from the same location, with the same owners, is an invitation to this type of problem. This is an area that needs legal advice from a qualified professional.
This article is intended only to provide you some general guidelines, based on New Jersey law. Every business situation is different and you should get qualified legal advice. There is no substitute.
© Steven R. Neuner, 2011. All rights reserved.