Closing Down a Business Without Declaring Bankruptcy
|Prepared By: Melissa C. Marsh, Los Angeles Business Attorney
Written: May 2002 - Last Updated: September 2015
Introduction To Closing A Business.
If you choose to close your store or shut down your business without declaring bankruptcy, there are many things you will need to do, including negotiating with your creditors. This article seeks to identify what such a business owner should do.
1. Identify Each Business Asset.
Identify and list all of your business assets, such as intellectual property (patents, copyrights, and trademarks), works in development, customer lists, licenses; partnership relationships, etc.. Then determine what each asset can be sold for and which assets can be sold immediately to raise cash. See if you have any security deposits with landlords, bonds with the state or local community, or deposits with the taxing authorities, and determine whether the money can be recovered by terminating the lease, subletting, filing a return, or other document. Diligently review any real property leases to determine the possibility of subletting; subletting may be advantageous if the lease payments are below market value or if you are in a particularly desirable location.
2. Mark Each Asset that Serves As Collateral for A Secured Debt.
Secured creditors have a property interest in the asset serving as collateral and in turn the proceeds from its sale. Sale of an asset that secures a debt, without the secured creditor’s permission, may lead to liability for breach or fraud. In addition, if your lease is deemed an asset (e.g., low rent, desireable local) note that it does belong to the lessor (landlord); check the lease for any restrictions on subletting or assigning the lease to another person or entity.
3. List Each Business Debt That You Are Personally Liable For.
Check for any personal guarantees given with respect to real property leases, equipment leases, credit card accounts, and business trade accounts. Note that if a contract is in the name of an individual, that individual may be deemed to have given a personal guarantee. Also note that officers and directors of a corporation may be held personally liable by law for the trust fund portion of unpaid employment taxes and sales taxes.
4. Get Fair Market Value For All Business Assets Sold.
Management cannot just give away the assets or sell them for far less than their worth because the value of the business's assets essentially belongs to the creditors of the business. But remember, your assets are only worth what someone is willing to pay for them, here, now and in their present condition (“liquidation price”). With that in mind, get the best price you can. Sales may be for cash, for deferred payments, or for a piece of the future action, so long as you get a commercially reasonable, liquidation, price.
5. Create and Maintain a Paper Trail.
Document the condition of each business assets, especially intellectual property, at the time of sale and your efforts to find a buyer in the time available. If a creditor later challenges your disposition of the asset, you have a record to support the sale at the price you received.
6. Create a Payment Plan For Debts.
First, pay any due and owing trust fund taxes. Then pay those vendors or employees that are essential to help the company wind up its affairs and close down. Then develop a plan to pay all debts for which you gave a personal guarantee. Finally, arrange for the filing and payment of your final tax returns and issuance of W-2's to employees.
7. Keep All Business Records.
Back up all financial and other vital data on your computers so these records remain available even if the computers themselves (assets) are sold. Store all electronic and paper records where they can be easily accessed, if necessary for a period of not less than 5 years.
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