Winding Up Definition

Learn more about what winding up menas in business.

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Winding up is a normal step in owning a business. Entrepreneurs have many reasons for wanting to “wind up” or close a business. Maybe you want to retire or start a new venture, or the business wasn’t as profitable as you’d hoped. Whatever the case, winding up is an essential part of closing your small business. This page will include the definition of winding up, winding up advantages, and when you’ll need to do so.

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What is winding up?

Winding up is one step in dissolution, where the owners work to “wind up” the business operations. During winding up, the owners publicly announce the closing and distribute the value of the business to creditors and shareholders. According to the winding up business definition, the owners will sell off the business or liquidate the business assets. Once the business assets are liquidated, the business will pay off creditors. Shareholders get paid last out of any remaining assets.

What are the steps to winding up?

If you run a limited liability company, you can follow this list for winding up:

Complete all contracts and obligations
Collect all company assets
Appraise all company assets
Sell property that will not be distributed to members
Pay debts to creditors other than members
Pay debts to member creditors
Pay the costs of winding up company affairs (like to a liquidator)
Set aside a contingency fund to pay any taxes or liabilities that arise following dissolution
Return capital contributions to members
Apportion profits or losses among members

Corporations take similar steps for winding up. It’s important to follow your state’s requirements for your legal entity. Don’t forget to cancel any business licenses and file final tax returns with the IRS and the state. Once you’ve wound up the business, you’ll file your Articles of Dissolution (or Certificate of Dissolution) to officially close your business with the state.

Other Names for Winding Up

Winding up the business can also be referred to as:

Liquidation
Closing the books
Going out of business
Shutting down
Folding
Winding down

No matter what you call it, winding up has its benefits. You’ll officially close the business and attend to all the loose ends. If you miss winding up, the disadvantages include owing taxes, paying late fees, and being sued by shareholders or creditors who didn’t get their share.

Winding Up Examples

Winding up can be compulsory or voluntary. Compulsory winding up occurs when a court orders the business to close. This might happen if you’re behind on your taxes or other legal obligations. If things aren’t going well for your company, the owners can vote to close and begin a voluntary winding up. Here are some well-known companies that chose to wind up:

Payless
Circuit City
RadioShack
Borders Group
Blockbuster

These companies voted to wind up after years of deep financial distress, but you don’t have to wait until things are dire before winding up your business.

Summary

This page explained winding up and its definition, including selling off the business assets and paying off creditors. After you’ve completed winding up the business affairs, you can close your business without worrying about any lingering obligations.

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We’re in the business of helping entrepreneurs form and maintain their businesses. If you’re wondering about winding up and its meaning, we’re here to help. When you form your business with us, our team of business experts will provide guidance for every stage of ownership.

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.