There are a number of reasons why you might want to sell or close a business. Maybe you’re ready to retire. Perhaps you want to start a new venture. Or maybe things have gone south with what started out as a promising business, and you’re trying to avoid bankruptcy. Whatever your reason, understanding the steps to close down a business can help streamline the process.
The actual process of closing a business varies depending on several factors. These include the type of entity involved, with different steps involved for a corporation vs. a limited liability company (LLC). The company’s financial situation also affects the closure, and the process may vary depending on how many partners or members have ownership rights. This article will serve as a basic guide to closing and/or selling LLCs and corporations. Other types of business entities will follow slightly different steps.
In addition, each state has unique rules regarding closing or selling a business. It’s important to review the laws in the state where your business was formed to make sure you touch every base and take all the required steps. If you run into issues at any step of the process, seek legal advice to get questions answered and receive guidance through the process.
The first steps to closing a business involve gathering information.
Before you close any business, especially if you plan on selling or transferring it to someone else, you should know what your business is worth. A professional business valuation provides you with this valuable information. It gives you an objective perspective on your company’s value, untainted by any sentimental value you may attach to it. The valuation helps you set your asking price and assures prospective buyers that your price is fair. It should include all your business assets, including all real estate and inventory.
Among the elements feeding into your business’s valuation are its debts. These can include money you owe to your bank, vendors, landlord, and service providers. Depending on your financial situation, you may want to pay off those debts, making sure you get confirmation that bills are paid in full.
If you’re selling your business, you’ll need to provide many documents related to your company’s financial and business operations. Prepare for closing the business by gathering the following:
Corporations also need to provide:
In addition, the buyer of your company is likely to require the following financial documents:
The process for selling an LLC can be slightly different depending on whether you have a single-member or multi-member LLC.
It’s much easier to sell a single-member LLC than a multi-member LLC. With your buyer, draw up a mutually agreeable sales contract. Your LLC’s operating agreement should contain clear instructions and steps for transferring ownership of the company. Follow all these instructions carefully. Once you sign the sales contract, you have officially transferred ownership.
If all the members of the LLC have jointly decided to sell the company, then you can follow the same process outlined above for selling a single-member LLC.
If you’re selling your interest in the LLC but other members of the LLC are staying with the company, turn to your operating agreement to see if it specifies a process for the sale. If it does, follow that process. If it doesn’t, the members remaining in the LLC may have to dissolve the company and reform it without the member who’s leaving. If you don’t do so, you may encounter significant legal problems down the road.
Closing your LLC is officially known as the “dissolution” of the company. Your operating agreement should include instructions on how to dissolve your company, and you should follow those. If you have a multi-member LLC, all members must sign off on the dissolution, or it can’t happen. If your operating agreement doesn’t contain full dissolution instructions, check with your Secretary of State’s office and follow the dissolution instructions provided there.
Regardless of the instructions in your operating agreement, you must file official dissolution paperwork with your Secretary of State’s office. In most cases, you’ll file Articles of Dissolution, which detail how your business’s assets, debts, and liabilities are to be distributed. Some states also require a statement from your state’s tax board confirming that your business taxes are all paid. If you fail to file the required dissolution forms, the members of your LLC may all face liability.
In addition, you need to cancel any permits and licenses that the LLC holds. Cancel your business names and registrations, as well. If your LLC has employees, make sure you’ve paid them fully, according to state and federal laws.
You also have some tax obligations to take care of as you wrap up your LLC. The IRS requires you to take the following steps as you close your business.
Selling an interest in a corporation is much simpler than in an LLC because the transaction simply involves selling stock. If you have a C corporation, check your bylaws and follow their instructions regarding selling or trading shares of corporate stock. With an S corporation, check the IRS guidelines to make sure you’re handling your transaction legally.
Before you can sell a corporation, your shareholders must approve the sale through voting. This requirement and others should be listed in the corporate bylaws.
Once you have approval for the sale, you must have a professional valuation done. This valuation should include all corporately owned real estate, vehicles, inventory, and other assets. It should also take into consideration any debts your company owes, amounts owed to employees for pay and benefits, and any outstanding contracts.
Assuming you already have an interested buyer for the company, you next have to negotiate the purchase agreement, sometimes preceded by a letter of intent. Typically, the buyer prepares this document, and you, as the seller, respond to it.
The contract should include all terms and conditions governing the sale, including what’s being sold, the agreed-upon price, the due diligence required, and the purchase timeline. Both the letter of intent and the purchase agreement must be signed by both buyer and seller to be valid.
Dissolving, or closing, your corporation usually requires a vote on the part of the shareholders. Check your bylaws for the exact procedure laid out there. Once you’ve made the decision to close your corporation, take a full inventory of your debts and assets.
You next need to file the appropriate forms with your Secretary of State’s office. Usually, the required form is called a Certificate of Dissolution or something similar. If you don’t file this form, your corporation’s directors may be subject to liability and could face financial penalties. Cancel your business name, if necessary, as well as all licenses, permits, and registrations that your corporation holds.
If your corporation has employees, inform them about your plans. Pay each employee’s final paycheck on their last day. Your state may require you to pay employees the value of their unused vacation days as well as any other earned benefits. Check with your state to make sure you’re taking care of all your obligations to your employees.
You also have to wrap up your financial obligations, including to the IRS. These obligations include:
If you find yourself with questions that can’t be answered through looking at your LLC’s operation agreement, your corporate bylaws, the IRS, or your Secretary of State’s website, you may want to seek guidance from your company’s attorney and/or accountant. Closing or selling a business has a lot of steps, and you may face penalties if you miss any of them.
Forming a business is also a process with many steps to follow. At ZenBusiness, we walk alongside you to make sure you don’t miss a thing. Contact us today to see how we can help with your business formation.
Disclaimer: The content on this page is for informational purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional in your state.
There’s a lot of overlap between the steps involved in selling a corporation and selling an LLC. Selling an interest in a multi-member LLC is slightly more complex than selling a corporation because all LLC members must agree to the sale. If they don’t, the LLC must be dissolved and reformed, adding a layer of complication.
While forming an LLC is significantly easier than opening a corporation, closing or dissolving an LLC and a corporation both involve very similar steps.
Most states don’t require you to have an attorney for the dissolution or sale of your business (though check with your state to make sure). In many cases, though, it can be helpful to have an attorney make sure you’ve met all legal requirements and go over all documents, as any errors can be costly.
Yes. If you don’t close your business, you must continue to pay the taxes and fees that the company owes, including any annual fees charged by your state. You may also incur late fees and penalties. In addition, you’re subject to continuing bills for any existing leases and contracts. You continue to be responsible for the actions (or inactions) of the company and could face possible lawsuits.
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