A Fork in the Road: Considering legal options to close your business

After evaluating options, many businesses will make the tough decision to close down due to the negative effects of COVID-19. Before making this decision, business owners should consider if they should file for bankruptcy, or simply dissolve the business. They may also consider maximizing the value of their business by selling it. If these are not viable options for your business, understand what it means to legally dissolve a business entity.

The first step in a dissolution process is to communicate your decision to all partners, employees, investors, and other stakeholders. Depending on your entity structure, a dissolution process may look different. In general, when your business is winding up, obligations and debts are still owed to the principle entity and those interested in its dissolution. After giving employees enough notice, make sure that all final payments and obligations are fulfilled. During this process, business will still be run for a short period of time, which means that you should consider keeping the minimum number of workers needed until the final close of business. If employees do not want to continue working, your burden and workload will significantly increase. Retained employees may need a more attractive temporary pay and benefits plan.

Before dealing with the obligations and debts that your business owes, consider what is owed to your business. During the dissolution process, business owners may encounter customers that are unable to fulfill their obligation to the business. Consider your options. If you have an accounts receivable, you may want to assign it to a financial institution that would be able to pay or provide a high percentage of the amount. Your last resort? A lawsuit. The value of the obligations and debts to your business will drive what options are proper to fulfill them.

Paying your business debts means thinking about IRS obligations, debts to investors, and property leases. Consult your accountant to ensure that you have and will properly fulfilled all obligations to the IRS. Investors, likewise, will expect a full repayment for their capital contributions. After these obligations are paid off, consider your property debt. Are you leasing your property, or do you own it? If you own your property, consider your options to sell. If you are leasing the property, will your landlord allow you to sublease, sell, or assign your lease? If your landlord does not give you these options, offer a termination fee. Consulting a real estate attorney is a best practice when reviewing these options.

Dissolving your business is not always a smooth process, however as you take crucial legal steps to terminate your business entity, always keep in mind that you have options on how to proceed. If you are uneasy about meeting financial obligations, consider different strategies, such as selling your business assets on a piecemeal basis in order to gain excess capital. Once all obligations are fulfilled, you should be able to confidently walk away from your business.

The SJS Law Firm can help you resolve this issue. For a complementary consultation, please contact us at (202) 505-5309.

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