Reasons for Dissolving a Business
In addition to the reasons mentioned above, ranging from money problems to partner disagreements, common causes for businesses to dissolve include:
- Poor cash flow: One of the preeminent causes for a business to fail and close its doors
- Poor management: A mistake here or there – incurring too much debt, buying the wrong product, hiring the wrong people – and pretty soon the business is underwater
- Competition: A competitor comes along with a product or service that’s superior and perhaps even more affordable, and you can’t match it
- Economy: A little over a decade ago came the Great Recession, which put such a bite on consumers that commerce and sales plunged; more recently, COVID-19 forced shutdowns of businesses that were doing fine until the virus hit
- Product liability: A product you’ve been selling proves defective, and customers rush for refunds or even file lawsuits
- Death or disability: One of the owners or partners in the business falls ill or passes away, leaving a void or placing an obligation on the business to buy him or her out
Dissolving a Sole Proprietorship
If you’re the sole proprietor of a business, that reduces the complexity of decision making. It’s just you, and if you feel you’ve had enough for whatever reason, you can definitely shut your doors with a single vote – yours. However, as with all business dissolutions, there are important steps that you must take.
Unlike a Limited Liability Company (LLC) or corporation, whose creation requires the filing of extensive paperwork with the state, your state may not require anything other than a business license, permits, and a fictitious name filing if you use a fictitious name for a sole proprietorship. When you decide to dissolve, you will need to cancel and withdraw all of these.
You will also need to pay your creditors (unless you intend to file bankruptcy) and any taxes due. Some states require you to obtain a tax clearance before you can dissolve. You will also need to serve notice to your creditors that you’re ceasing operations and ending all obligations as of a certain date. You also should notify your customers, even if it’s just a sign on your door.
Dissolving an LLC
An LLC is an oft-used business structure that allows individuals to form a joint enterprise that reduces their individual liability. The founders become known as members, rather than as partners or owners per se. In forming the LLC, the founders must file an operating agreement and perhaps other forms with the Secretary of State or other entities.
The operating agreement will generally dictate how a dissolution decision can be made, usually by a majority vote or another type of concurrence. Since the LLC was filed with the state, the dissolution must be filed with the state as well, or the annual obligations for paying fees, submitting reports, and paying business taxes will continue even as your enterprise is no longer operating.
The same obligations to pay debts and taxes, inform creditors and customers, and cancel all permits, licenses, and fictitious business names also apply just as they do to the sole proprietor.
Dissolving a Corporation
Dissolving a corporation is a bit more involved than an LLC and certainly more so than a sole proprietorship.
First of all, to form a corporation, whether traditional or subchapter S, you must create and file articles of incorporation and bylaws for public viewing, along with any other documents your state requires. These articles and bylaws will specify how a dissolution can take place. Generally, the board of directors must first vote on the issue, and then submit their decision to the shareholders for a further vote.
In a small, closely-held corporation, the board and shareholders may be the same people, but in a larger corporation, these votes can be dramatic, emotionally exhausting events involving many people with varying levels of involvement.
Each state requires that dissolution documents be filed. If they’re not, even if the corporation ceases operations, yearly reports, fees, and taxes may continue after the business has closed.
Again, all tax, debt, licensing, permitting, and fictitious naming cancelation requirements must be met as well. If your corporation is registered or qualified to do business in another state, you must file the necessary forms to terminate those registrations as well.