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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, desirable 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.

© 2002 - 2015 Melissa C. Marsh. All Rights Reserved.

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Disclaimer: The information presented on this web site was prepared by Melissa C. Marsh for general informational purposes only and does not constitute legal advice. The information provided in my articles and alerts should not be relied upon, or used as a substitute for professional legal advice from an attorney you retain to advise or represent you. Your use of this Internet site does not create an attorney- client relationship. Transmission of this article is not intended to create, and receipt of it does not constitute, an attorney-client relationship. All uses of the contents of this site, other than personal uses, are prohibited. You may print or email a copy of any information posted on this web site for your own personal, non-commercial, use, but you may not publish any of the articles or posts on this web site without the Express Written Permission of Melissa C. Marsh.

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Located in Los Angeles, California, the Law Office of Melissa C. Marsh handles business law and corporation law matters as a lawyer for clients throughout Los Angeles including Burbank, Sherman Oaks, Studio City, Valley Village, North Hollywood, Woodland Hills, Hollywood, West LA as well as Riverside County, San Fernando, Ventura County, and Santa Clarita. Attorney Melissa C. Marsh has considerable experience handling business matters both nationally and internationally. We routinely assist our clients with incorporation, forming a California corporation, forming a California llc, partnership, annual minutes, shareholder meetings, director meetings, getting a taxpayer ID number (EIN), buying a business, selling a business, commercial lease review, employee disputes, independent contractors, construction, and personal matters such as preparing a will, living trust, power of attorney, health care directive, and more.