Someone once told me that a sign of a successful entrepreneur is the ability to know when it’s time to throw in the towel and move on. It’s true that one failed business doesn’t define an entrepreneur. The end of one venture often signals the start of something new … the beginning of the next exciting journey. This is particularly true in the fast-paced high-tech and software world. As a result, it’s critical to identify the signs that it’s time to shut the doors on a languishing project.
Closing a business doesn’t just mean selling your assets and calling it a day. You’ve got to go through the right steps to ensure your business is legally closed and you’re primed for what’s next.
How to Know It’s Time
Deciding to pull the plug and move on is one of the hardest decisions to make. After all, the business is probably a product of long nights, personal sacrifice and determination. While it’s a personal decision with no easy answer, here are some common questions to help you know if the time is right to close your business:
Is there still a market for your products or services? Sometimes the market conditions or assumptions you made when you launched your business no longer hold true. You should objectively assess the current market trends to see if there’s still a place for your business.
Is the business still fun? Are you still motivated? Entrepreneurs should be happy and fulfilled with what they’re doing. If running your business feels like a chore on the majority of days, then consider moving on.
Have you failed to make a profit after five years? While actual profitability timelines are going to vary wildly across different business models and industries, the fundamental goal of any business is to make a profit. It’s wise to establish a time frame when you think your business should be profitable and if you reach that point and fail to break even, it might be best to close shop and move on to something new.
How to Shut Down the Right Way
If you decide it’s time to close a business, there are several steps you’ll need to take. The goal throughout the process is to close the business as quickly, smoothly and cost-effectively as possible so you’ll be ready to move your resources and passion into a new venture.
1. Dissolve your LLC or corporation. If you’ve been operating as a corporation, LLC or partnership, all business associates need to vote on closing the business and the final vote should be recorded in the meeting minutes. If shares were issued in a corporation, two-thirds of the voting shares must agree on the dissolution. If no shares were issued, the Board of Directors must approve to dissolve the company. Specific rules for LLCs vary by state and you should review the dissolution requirements in your state’s LLCA (Limited Liability Company Act). After the vote, you’ll need to file a form called “Articles of Dissolution” or “Certificate of Termination” with the Secretary of State’s office in the state where your LLC or corporation was formed. Be sure to follow your state’s instructions to the letter. Otherwise, members can be held liable for any debts or responsibilities of the company after it’s been dissolved.
2. Pay off any debts. In order to properly close your business, any company debts must be paid. In most states, an LLC or corporation must settle its debts before you can distribute any money or assets to the members. If your business doesn’t have enough money to pay off the loans and debts, you should consult with an attorney.
3. Close your business’s federal and state tax accounts. Just because your business isn’t bringing in any revenue anymore, it doesn’t mean you’re automatically off the hook with the IRS. You’ll need to notify the IRS that your business is no longer operating by closing your Employer Identification Number (EIN). You’ll also need to file your final federal and state tax returns (check the box indicating that this will be the final return). And if applicable, your company’s payroll withholding taxes must be up to date. Members or owners can be held personally liable if the business’s payroll taxes aren’t paid.
4. Cancel any business licenses or permits. Contact the county where your business is located and cancel your business license, as well as your seller’s permit or any other permits you hold. Be active about cancelling these things, because you could still be assessed fees and taxes if the county doesn’t know your business is no longer in operation.
5. Notify any vendors, contractors and clients. If you’re closing a business, you’ve most likely already made preparations for stopping work with your customers or clients. However, you should also notify any contractors, freelancers, vendors and suppliers that you’ve done business with. Don’t just leave them guessing why they haven’t heard from you in a while. By being considerate and upfront with your network, they’ll be more likely to join you on your next project.
Closing a business can be the start of something new, but you need to take the process of closing your business just as seriously as you did opening it. If you know you’ve moved on from a business, start the dissolution process as soon as possible. By closing it while it’s still 2012, you’ll be spared from paying any taxes or fees for 2013.
Read more posts about legal and tax issues affecting small business.