Updated: Jul 15, 2020
By Tsu Li Liew
Dissolving your business is never an easy decision, especially in the age of COVID-19. Here, we'll provide the important steps in helping you navigate through the dissolution process, highlighting ways that COVID-19 can affect this process.
1. Make the decision to dissolve
The first step to dissolution is to make the decision of dissolving the business. While it is straightforward, it is not that simple when the business is set up as a partnership, limited partnership, limited-liability company or a corporation. In some business entities, for instance, it requires that a business owner and other partners or board members to reach a decision together to successfully close a business.
A sole proprietor can decide to close his or her business without another person’s opinion because a sole proprietor is the only one in charge. Once more people have a stake in the business, it will depend on what is written inside the articles of organization for the dissolution procedure, which might be different for each business. Some general partnerships might not have these articles or formal written agreement, but they are necessary to form limited partnerships, LLCs and corporations. Most commonly, either all co-owners or at least a majority of them (at least 50%) need to vote on and agree to dissolve the business.
The articles of organization might have specific details regarding the dissolution procedure. There might be requirements of a specific time and place for the vote, whether a notice needs to be sent out in advance to everyone who will participate in the vote or how many voting members need to participate in order for the vote to be valid. Depending on the state’s guidance on stay-at-home orders, these procedures might not be feasible and an amendment to the provision might be required to make the vote possible. Again, it will depend on the articles of organization if making an amendment is allowed and the procedure to change a provision in order to make the vote happen.
Once everyone agrees to dissolve the business, a written agreement should be made for the purpose of documenting the decision.
2. File the dissolution documents
The next step to dissolve a business is to file the dissolution documents with a state government agency. This will depend on which state the business has been incorporated in, which can sometimes be different from the state the business is located. For example, many businesses, though not physically present in Delaware, are incorporated in Delaware because they want to take advantage of Delaware’s laws.
Depending on the state of incorporation, the business owner will be required to file these dissolution documents with the same government agency where they registered their business in, such as the Secretary of State’s office, a Business Bureau, or a Business Agency.
It is important to file these documents to effectively close the business. Otherwise, the business will still exist legally when the main operations have stopped. In that case, the owners will still be required to pay taxes for the business while the business might be subjected to other filing requirements.
3. Cancel registrations, permits, licenses, and business names
Once the business owner has filed the dissolution documents with the state agency, the owner needs to cancel any registrations, permits, licenses and trademarks that the business had previously used. The requirements will vary depending on the types of registrations, permits, and licenses used. A business owner can check on how to cancel them by going to the government agency’s website, where they applied for these registrations, permits and licenses, for information on how to cancel them.
For example, trademarks registrations will depend on whether the owner filed with the U.S. Patent and Trademark Office or with the state’s equivalent agency. For federally-registered trademarks, the owner can voluntarily surrender the trademark for cancellation without a fee by filing an affidavit or declaration, and the owner can prove that the registration is under his or her name. The USPTO TMEP provides more information at this link. However, state-registered trademarks are dependent on the individual state agency, which might have a different procedure.
While failure to follow this step will not result in any fines, it is recommended in order to protect any finances and reputation of a business and its owner, and to prevent other people from illegally using these licenses or permits. If other people get their hands on these materials, the business owner might be on the hook for these new expenses, even though his or her business is not the one using the permits or licenses. Therefore, it is a precautious step to stop anything bad from happening in the first place.
4. Notify and pay employees
If the business has employees, the owner might be required to give them a month or two months’ notice in advance of dissolving their business. This might depend on how many people are employed, as well as federal and state laws that apply.
For example, the Worker Adjustment and Retraining Notification Act (WARN) requires a 60-day notice for closings and lay-offs. WARN generally applies to employers who have at least 100 employees who have worked at least 6 months or more than 20 hours per week. Some states will apply the same standard to smaller businesses.
This is a stressful and uncertain time for business owners and their employees, especially with unemployment rates being at a record high. Despite these unprecedented times, this Harvard Business Review article about letting employees go is true. A business owner should be honest with his or her employees about the state of the business, dismiss any rumors that will confuse people, and not leave them unsure about the state of their employment. If the business provides the employees any benefits, a business owner should be upfront about when those will terminate as well. After all, these are the employees that helped to build a valuable business for the owner. A business owner could also try to help employees by hosting resume workshops or other professional development events.
5. Resolve any remaining financial obligations.
Dissolving a business means that a business owner must resolve his or her financial obligations, which can include paying final federal and/or state taxes, employee pay and benefits, and third-party contracts. This process is known as “winding up.” For more information on the “winding up” process, check out Evans & Dixon’s Blog for Business Law post or Steven E. Springer’s post.
A business owner should notify the relevant federal and state tax agencies of a dissolution. A business owner can do that by filing an annual tax return for the year that the business will dissolve. There is a check box on the form that notes that the filing will be the final one and a business owner will have to mark that box to inform the IRS. The forms can be found on the IRS’ website and filing will depend on which type of business will be dissolved, whether it is a partnership, a corporation, or an LLC, or others.
If a business has employees, filing the final employment tax returns is required, in addition to making federal tax deposits of these taxes. The business owner should also attach a statement to the return that includes information such as the name of the person keeping the payroll records and the address where those records will be kept.
A business owner should also cancel his or her Employer Identification Number business account with the IRS. To do that, the owner should send the IRS a letter that includes: 1) the complete legal name of the business, 2) the EIN, 3) the business address, 4) the reason for closing the account, and if possible, 5) a copy of the EIN Assignment Notice that was issued. The EIN is permanently associated with the business and will not be re-issued with a new business down the line. However, the SBA and IRS still recommend closing the account when dissolving a business.
State law will govern when an employer needs to pay the final paycheck to its employees. Some states require employers to pay by the last day of the business, and others require the employers to maintain a payroll schedule. Certain states include unused sick leave and vacation days as part of an employee’s final paycheck.
A business owner might still have some accounts receivable, outstanding debts and contracts with third parties to fulfill. For accounts receivable, it will be easier to collect while the business is still operating than when the business has been dissolved. On the other hand, debt creditors might still be able to collect debts from a business owner if the business is defunct. This will depend on how the business was incorporated, whether as a sole proprietor, a partnership, an LLC or a corporation. Usually, the owners of an LLC or corporations will be protected against any debt collectors, while a sole proprietor and owners of a partnership will have to pay. Additionally, in a partnership, all owners will be personally responsible and may have to pay for the debt, even if it was another partner who took out a loan for the business. This risk continues even after the business has dissolved. However, it will ultimately depend on the contract between the business owners and the debt creditors on whether anyone will have to pay.
Depending on whether any of the contracts contain a force majeure provision, a business owner might be able to use that provision to end an agreement. Force majeure provisions apply when an event occurs that disrupts either parties’ ability to fulfill the contract. In this case, neither side of the agreement is at fault. Each agreement’s force majeure provision will be different, and some might include a list of examples. For more information on the impact of COVID-19 on force majeure provision, check out Akerman’s article.
If there are any remaining assets, such as unsold inventory, leases or real property, a business owner might be able to sell those assets in order to gain some capital back. This is referred to as the liquidation process. It includes making an inventory of the available assets, hiring an appraiser to value the items, choosing a time and place to sell the inventory, and more. However, a liquidation process will have some unique challenges at the moment due to stay-at-home orders. For example, it might be hard for an appraiser to physically examine any unsold inventory, if needed to, and hosting a sale or an auction might not be feasible at the moment either, depending on the location. Business owners could either set up online sales or wait until stay-at-home orders have been lifted to allow people to come together. It is important to remember that the money from selling assets will first go to any debt creditors before the owners can receive any.
6. Maintaining records.
Even though a business may be dissolved, a business owner might be legally required to maintain tax and employment records, and other files for the next several years. The IRS recommends keeping these records on hand for five to seven years, so that the records will become evidence if a business owner can amend a tax return to claim a credit or refund or the IRS calculates additional taxes. It is important to remember that poor record keeping poses a security risk for a business owner and his or her former employees since tax and employment records contain sensitive and private information.
A simple, but effective method is keeping the paper records in folders. A business owner could also save these records on a hard drive or use a cloud-based storage system to save physical space. Regardless of the method of record keeping, it is important that a business owner ensures that these records are properly labelled and kept in a safe place to not damage or lose them. For computer-based storage, a business owner should also keep in mind that the computer might be vulnerable to viruses or hacking attempts and should try to reduce that risk. For more information on recordkeeping and maintenance, check out the IRS’s guide here and the SBA’s guide here.
For more steps on the dissolution of a business, check out the SBA’s guide, which you can find here.
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