Business Closure Attorney: 6 Tasks Worth Paying a Lawyer For When a Company Shuts Down

Closing a company that owes debts can get complicated; here a lawyer is worth paying for six jobs: deciding in what order to give notice to banks, landlords, vendors; employees and final pay; sales and payroll taxes that can become personal; dealing with creditors and secured debt; formally dissolving the entity with the state; lawsuits or an assignment for benefit of creditors. Get a business lawyer and accountant to talk to before you end leases, sell equipment, or stop utilities.

The Order You Notify People in Matters

Talk to a lawyer before you send any letter, make any phone call or send an email. Once notice goes out, creditors can close accounts, cancel lines of credit, offset debts against deposits, even declare default and sue. A lawyer must review the bank loan papers to determine your vulnerability and the timing of any notice that might be given.

If you owe months or years of rent, the landlord may have a duty to try to re-let the space, but also has the right to sue you for the shortfall. He may also try to lien anything still in the property. Try to find out if the landlord will agree to a “mutual termination” or to apply your security deposit to rent. If you personally guaranteed a lease or loan you can be sued with the business, even after it closes. An SBA loan generally requires a guarantee from an owner of 20% or more. That debt follows the individual after the business shuts down.

Suppliers can help keep you afloat or drown you. Telling them early can prompt them to take quick action to “get what they can” by demanding C.O.D. terms or even trying to reclaim their goods. A vendor that has given you credit may react by canceling it. If you have goods in your store that you cannot sell, try to arrange to return them to the vendor before you shut down. If you have people who have paid deposits for products you cannot deliver, consider using incoming payments to make those customers whole, or try to find a replacement business to take over the work.

Employees come next. Give as much advance notice as you can. Don’t cancel insurance; they may have a sick kid at home. Check the state requirements for final paychecks. The federal Worker Adjustment and Retraining Notification Act requires employers who have one hundred or more full-time workers to warn workers ahead of time if they plan to close a plant or facility where fifty or more people will lose jobs in a 30-day period. Failure to comply with the WARN Act can mean back pay and benefits up to sixty days.

Personal Liability

Payroll taxes and sales taxes are held “in trust” by the employer. The state or IRS can come after you personally if you failed to pay sales tax or payroll taxes that you withheld from employee checks. The IRS can hold you personally responsible for 100 percent of the payroll taxes you should have sent in, but didn’t. Paying other bills before turning over those taxes can be a sign to a court that you knew what you were doing and that you acted willfully. At a minimum, have a tax lawyer or accountant review the situation before you cut any checks.

Corporations file state and federal tax returns right through the closing date of the business. A corporation needs to file IRS Form 966 no more than 30 days after adoption of the resolution to dissolve. The IRS will not close out an EIN until all tax returns have been filed and all taxes have been paid.

For unsecured debts like utilities, phone and Internet, credit card balances and unpaid bills, contact each creditor to try to work out some plan for repayment. If your name is on the debt, creditors can try to collect from you personally; check your personal liability before you decide which creditors to call first. Not paying on a lease or loan on a car or truck is the same as defaulting on a loan. Your creditor may repossess the vehicle, sell it at auction, and then sue you for the deficiency. You may want to return property to stop repossession.

If you are selling assets or inventory in bulk, you may have to notify the creditors under the bulk sales law. Be careful about repayment of personal money you put into the business. A trustee in bankruptcy may be able to “claw back” payments made to any insider of a company within a year before filing bankruptcy if the company was insolvent when it made the payment, and if the person getting back the money got more than he would in Chapter 7 liquidation.

Dissolve Properly

Follow the rules and make a filing with the state where the LLC or corporation was created, disclosing debts, assets, owners’ consent, etc. It is important to dissolve properly so that you are not on hook for taxes and annual filings in that state in the years to come. Some states want proof that there are no back taxes owed. Follow the articles of incorporation.

In Delaware, a dissolved corporation continues in existence for 3 years to wind up its affairs, which can be extended by court. A formal notice giving creditors at least 60 days to file a claim against the company bars late claims. A shareholder’s liability is capped at what he or she received in the dissolution.

If you are served with a lawsuit, take it to an attorney and get your company a lawyer. The Supreme Court says that a corporation cannot appear in federal court without a licensed attorney. Corporations and partnerships do not get discharges in Chapter 7.

Another option is an assignment for benefit of creditors, a process where an assignee winds down the business. The assignee hires accountants, auctioneers, and attorneys. An ABC is a state court supervised process. If any assets are sold, the assignee gets a commission.

The point is, as with so much else in the law, taking a simple step without knowing where it will lead can create issues that far outweigh the time and expense of taking professional advice before a disaster strikes.