Closing your business can be a difficult process no matter what the circumstances. After all, you have likely poured significant money, time, and effort into your business. While it may seem more costly and time-consuming, working with an attorney to dissolve your business formally is always a good idea. If a business dissolution is not handled properly, you could face significant liability after you close your doors.
How to Close a Business
The term "business dissolution" refers to the legal process of closing a business. There are a myriad of reasons why business owners may elect to close their doors, including financial challenges, partnership issues, shareholder disputes, or the desire for different opportunities.
In most cases, you are not legally required to retain a business dissolution attorney. However, given the complexity of the process, it almost always makes sense. Below are just a few of the legal issues that must be addressed:
- Filing Dissolution Documentation: When closing a business, you must file several important documents. An attorney can help ensure that all of the necessary documents are correctly filed with the relevant entities. For example, under New York law, limited liability companies must prepare and file the articles of dissolution with the New York Secretary of State within 90 days of taking action to dissolve the LLC.
- Settle Outstanding Business Debts: It is imperative that all of your debts are paid prior to officially dissolving your business. An attorney can help you identify and prioritize which debts must be paid and work to reach the most favorable settlements.
- Resolve Tax Liabilities: When dissolving a business, you must also file income, employment, and sales tax returns with the appropriate tax authorities. For instance, New Jersey corporations must submit an Estimated Summary Tax Return, pay any amounts due, and obtain aTax Clearance Certificate In addition, the dissolution is considered effective as of the date the Division of Revenue receives the properly completed and executed articles of dissolution, payment of all fees, and notice of Tax Clearance from the Division of Taxation. Working with an accountant and a tax attorney is the best way to verify that you have no outstanding tax liabilities after your business is closed.
- Cancelling Leases and Other Contracts: Every business has numerous contractual obligations and each agreement should specify the process for notifying the other party that you plan to dissolve the business and terminate your contractual obligations. An attorney can guide you through the process of terminating your contracts and reduce the risk of a breach of contract claim. If you lease property, it is particularly important to seek legal guidance, as an attorney can help you negotiate the most favorable terms for ending your lease.
- Selling and Distributing Assets: Upon closing, businesses often have significant tangible and intangible assets, including commercial real estate, equipment, and intellectual property, that must be distributed or sold. Additionally, any outstanding funds must be dispersed to the company's remaining shareholders, members, or partners. An attorney can negotiate the sale of these assets, as well as verify that assets are distributed fairly and in compliance with all applicable laws.
Common Business Dissolution Disputes
It is not uncommon for disputes to arise during the business dissolution process, particularly if disagreements between partners, investors, or management prompted the closure in the first place. The most frequent sources of friction include how to divide up assets and liabilities. When dealing with disputes among co-owners, mediation can be an effective conflict management tool. In working with a mediator, owners can often reach a resolution that allows the dissolution process to move forward, saving both time and money.
Breach of contract claims can also result from a business closure. During the dissolution process, a business not only retains the right to expect the performance of their existing contracts, but also remains responsible for performing or paying on those contracts. In many cases, an attorney can help terminate a contract early without legal repercussions; although, it becomes more challenging when dealing with poorly drafted contracts. Other issues, including non-compliance with a contract's termination provisions and failure to pay early termination penalties, can also lead to potential breach of contract liability.
Disputes over the payment or outstanding taxes can also arise and may subject corporate officers to personal liability. For instance, if dissolution procedures are not completed, and full payment of the outstanding liability is not received, the New Jersey Treasury's Division of Taxation may pursue a collection action against the corporation and its corporate officers. Under New Jersey law, any officer or director of any corporation who distributes any assets in dissolution or liquidation to the stockholders without having first paid all corporation franchise taxes, fees, penalties and interest can be personally liable for unpaid taxes, fees, penalties and interest.
Work With an Experienced Business Dissolution Attorney
While the business dissolution process can seem like a hassle, simply walking away will almost always lead to problems down the road. It is imperative to take all the necessary steps to formally close your business and resolve all outstanding liabilities.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.