What You Need to Know
Who can advise me about winding up my business?
There are many sources of professional help available, and it is crucial that you seek the right advice in order to achieve the best possible outcome for your business, your customers, and your staff:
- Attorneys. Finding and listening to expert legal advice is vital during this type of business process. An attorney will also be required to draft legal documents that the dissolution of the business will require.
- Accountants. Your accountant will provide essential advice on financial planning and tax consequences of dissolving or selling your business. An accountant should be consulted as early in the deliberations as possible. He or she will also be able to help when preparing the business for sale to prospective buyers or liquidation outright.
- Business advisers and brokers. These specialists will provide a range of commercial information and assistance about all aspects of the decision to cease business. Seeking the advice of an impartial adviser often helps keep the processes in perspective and can present an objective outside view at what can be a very difficult time for an organization.
What to Do
Determine Whether You Are Solvent
Do a detailed analysis of your business’s financial position, asking yourself a series of questions—and it’s important to be realistic about the answers.
- Is the business able to pay its debts at or near the time they are due?
- Are the assets of the business worth more than its liabilities? (Make sure you consider any future liabilities you are likely to incur, and any unexpected liabilities that may arise.)
- If the business were liquidated now, could it meet all its liabilities in full? (Remember to include the cost of debt collection and liquidation.)
Even if the future looks bleak, there may be several alternatives to outright liquidation. Federal bankruptcy laws offer opportunities to reorganize under the familiar “Chapter 11” of the federal code. If a business does decide to liquidate, it must follow “Chapter 7” of the code.
Chapter 7 bankruptcy is the end of the line
The company stops all business operations, and a trustee is appointed to liquidate—that is, sell—the company’s assets, which are then used to pay off debts to credits and investors. However, administrative and legal expenses are paid first. The Chapter 7 code also determines order of payment; but, generally, bondholders are paid first, because bonds represent debt. Notably, stockholders and owners are paid last, because they took the greatest risk in the first place.
Understand the Rules for Dissolving a Limited Liability Company
Without formally dissolving a limited liability company, it still will be considered an “active” company and be liable for annual taxes and fees—even if it has discontinued day-to-day-operations.
The operating agreement of a limited liability company also sets forth reasons for dissolving it, which can include the death, bankruptcy or withdrawal of a partner. In theory, that makes the process a little easier. Whatever the reason, though, partners have a duty to be honest throughout, and not to mislead anyone. There should be no legitimate reason for not being honest, since the principle of limited liability means that shareholders are only liable for company debts up to the value of their shares.
The procedures vary by state, so it’s best to notify the state in which your business was formed and does business, then follow its rules and procedures. In most cases, this begins with the filing a “Certificate of Dissolution” or “Certificate of Cancellation.” Upon receipt by state authorities, other steps in the process begin. Completion of this process typically includes a verification of “good standing,” which declares that the company in question has paid its taxes and has filed all required reports the state requires.
Understand the Rules for Dissolving a Partnership
Since a partnership has no separate legal identity, it may be dissolved by an agreement between partners or by notice of dissolution given by one partner to the others. The partnership agreement may provide for dissolution after a specified period of time, or according to other set terms.
Once an agreement has been reached, dissolution may proceed, usually handled by the partners themselves. Financial statements are prepared and the dissolution is advertised. All clients must be given notice that the business has been dissolved.
The mutual responsibilities of partners during a dissolution of their business should be set down in the partnership agreement. This is important because in most cases each partner is personally liable for all partnership liabilities.
As always, partners should work closely with attorneys and accountants to protect their best interests and avoid liability issues that can linger long after the business is gone.
Know Your Responsibilities to Employees
Debts which a business owes to employees for wages or services rendered during the four months prior to its insolvency, and all accrued holiday pay (up to a t are designated as “preferential” debts and should be settled before any other claims.
If immediate payment is not forthcoming, employees have the right to apply direct to the Secretary of State for payment of a designated portion of what is owed from the National Insurance Fund.
It is important during liquidation that employees are kept informed of what is happening to try and retain as much loyalty as possible while the process is being worked through. Employees working in the finance area are particularly important during this phase, due to their knowledge of the business accounting procedures, financial filing and archiving systems, and so on.
Remember That Directors Have Special Responsibilities
A director of any business is in a special position of fiduciary responsibility and has a duty to act in the best long-term interests of a company’s shareholders at all times. This is especially true during a liquidation. Experts cite three specific duties:
- Duty of care, which requires prudent actions and decisions at all times;
- Duty of loyalty, which puts the interests of the business first;
- Duty of good faith, which obligates directors not to “stick their heads in the sand” and allow any actions that could harm the company
Essentially, directors cannot continue “business as usual” when there are indications that serious financial troubles may lie ahead. Directors who do not act accordingly risk serious legal consequences—if even might try to resign. On the other hand, a director probably will not be found liable if it can be shown that every step was taken that ought to have been, to minimize the loss to the creditors.
What to Avoid
You Never Had a Partnership Agreement
When a business partnership is formed, it is vital to draw up an agreement that is a legally binding document. The agreement will set out the procedures to be followed during liquidation or winding up. Forgetting to do this can have vast consequences when shutting down a business.
You Don’t Inform Employees about the State of the Business
It’s critical that employees be informed of what is going on during a liquidation; try to give them as much notice as possible of any changes, especially if they risk being laid off as a result of any decision. This will enable them to look for other work if necessary.
Where to Learn More
Book:
Branch, Ben, and Hugh Ray and Robin Russell.
Web Sites:
Business Law Center: http://business-law.freeadvice.com
U.S. Bankruptcy Courts: www.uscourts.gov/bankruptcycourts.html
