How to Close a Failing Business: 7 Decisions That Protect the Owner on the Way Out

An owner who has decided to close a failing business has already lost the argument with the balance sheet. What remains is a second argument, quieter and longer, about which debts stay with the company when it is dissolved and which ones follow the owner home.

That second argument is won or lost in the weeks between the decision and the final filing. Seven decisions govern those weeks. They appear here in the order of the harm each prevents, which is not always the order in which they present themselves.

1. Every New Signature Now Extends the Guaranty

A closing company still receives offers. A renewal, a consolidation, a supplier willing to extend terms if the owner signs personally: each converts a company obligation into a household one at the moment the company is least able to carry it. The first decision is a refusal to sign anything that places the owner's name beneath the company's.

The guaranties already signed deserve a closer reading than they received at signing. In LG Funding, LLC v. United Senior Properties of Olathe, the Second Department described owners who had executed "a personal guaranty of performance of all the representations, warranties, and covenants" in a merchant cash advance agreement, an agreement that treated a bankruptcy filing and a written admission of inability to pay as events of default. A performance guaranty reaches conduct as well as money. An owner who shutters the store, moves the deposit account, or writes a creditor that the company cannot pay may be supplying the very default the document was drafted to catch.

Dissolution leaves these papers untouched. The creditor notice procedures in New York and Delaware corporate law can bar late claims against a dissolved company, but they release no guaranty, and no filing with a secretary of state does.

The company can be dissolved. The signature underneath it cannot.

2. Collected Taxes Leave the Account Before Any Creditor Does

Two categories of money in a failing business never belonged to it. The first is tax withheld from wages, which the IRS describes as held "in trust until you make a federal tax deposit"; under 26 U.S.C. 6672, a responsible person who willfully fails to pay it over owes a penalty equal to the unpaid amount. The second, for a New York business that charges sales tax, is the tax collected at the register. Tax Law section 1133 makes every person required to collect it "personally liable for the tax imposed, collected or required to be collected," and section 1131 extends that class to officers, directors and certain employees "of a corporation or of a dissolved corporation."

The phrase "dissolved corporation" is the point. The legislature anticipated this exact exit. In the final month, the tax deposit is paid before the funder, before the landlord, and before the owner's own draw.

3. The Owner Is the Last Creditor Who Should Be Repaid

Owners of struggling companies lend them money, and the loan feels different from the others because the lender is also the borrower's only employee who never quits. Repaying it in the closing weeks is the most natural transfer a failing business makes. It is also one of the most exposed.

Consider, as a hypothetical, an owner who lent the company $60,000 in the spring and, in the last month of operations, has the company repay $40,000 from collected receivables while an equipment lender, two suppliers and an advance funder remain unpaid. Under 11 U.S.C. 547(b)(4)(B), a bankruptcy trustee can seek to avoid a payment to an insider creditor made between ninety days and one year before a petition, subject to the other elements of the statute and its defenses, and section 550(a) lets the trustee recover from the person who received it. Outside bankruptcy, New York reaches the same payment through Debtor and Creditor Law section 274(b), which makes a transfer to an insider for an antecedent debt voidable as to earlier creditors when the company was insolvent and the insider had reasonable cause to believe so, a claim that section 278 keeps alive for one year after the transfer; and since section 271 presumes insolvent any debtor generally not paying its debts as they come due (other than debts in bona fide dispute), the owner who knew the suppliers were waiting will find the "reasonable cause" element already written into the calendar.

Most of what protects an owner on the way out is restraint, applied early and recorded in writing.

The same logic reaches transfers that are not repayments at all. The company truck moved into a cousin's name, the equipment sold to a friend at a price nobody negotiated, the final receivables deposited into the owner's personal account (a step that feels, to the owner making it, like housekeeping, and that looks, to a creditor reading the bank statements eighteen months later, like the badges of fraud New York lists in section 273(b), among them a transfer to an insider, retained control of the property, and a transfer made after a suit was threatened): each can be unwound, and each costs more to defend than it saved.

If the owner's loan is genuine, it is a claim like any other. It waits its turn.

4. The Books Stay Whole, Including the Embarrassing Pages

New York's Business Corporation Law section 1006(b) provides that dissolution "shall not affect any remedy available to or against such corporation, its directors, officers or shareholders" for liabilities incurred before it. Claims arrive after the doors close. The records are the defense against them.

Keep the bank statements, the advance contracts, every payoff letter, and the payroll files; the IRS asks that employment tax records be kept for at least four years. A company that later lands in chapter 7 must surrender its books to the trustee, and a missing year is its own problem.

5. Employees Hear the Date Before Customers Do

Large closings carry statutory notice. Federal WARN reaches employers with 100 or more full-time employees and requires 60 days' written notice of a plant closing; New York's version starts at 50 employees and requires 90 days. Most small closings fall below both thresholds.

But the statutes that bind owners most personally are smaller ones. Business Corporation Law section 630 makes the ten largest shareholders of a New York corporation jointly and severally liable for wages owed to its employees, and LLC Law section 609(c) does the same for the ten members with the largest ownership shares, each subject to written notice within 180 days and other procedural conditions. Final payroll is therefore an owner's debt wearing a company's name. It is paid first, and on the schedule state law sets.

6. The Exit Is Chosen After the First Five, Not Before

Voluntary dissolution, an assignment for the benefit of creditors, and chapter 7 each end the company differently, and each deserves counsel's view of the facts. None of them helps an owner who has already signed new guaranties, skipped the tax deposit, or repaid a personal loan. An LLC or corporation receives no chapter 7 discharge in any case.

7. Customers Learn the Last Day From the Owner

A customer who pays a deposit on Tuesday for goods that will never arrive becomes a creditor on Wednesday. The closing business should stop accepting deposits it cannot honor and should tell existing customers, in writing, how and when deposits will be refunded or orders filled.

If a bankruptcy follows, section 507(a)(7) gives individuals a priority claim for undelivered consumer deposits, capped at $3,800 per person for cases filed since April 1, 2025. Priority is a place in line and not a promise of payment. The customers who were told nothing tend to call the attorney general. The ones who received a letter tend to call the owner, which is better, though not by as much as one would hope.

Where a Negotiation Still Belongs in a Closing

For many owners the largest item on the way out is a merchant cash advance carrying a personal guaranty, and the practical question is whether the guaranty can be released for less than the balance. Delancey Street negotiates those balances, and its first look at the contracts and bank statements costs the owner nothing and stays confidential. Delancey is not a law firm and never appears in court; when the file raises a legal issue, a lawyer licensed on his or her own account handles it. No funder is obliged to accept a proposal.

A company with several lawsuits pending, many creditors and few assets may need bankruptcy counsel before it needs a negotiator, and an honest review will say so. The order of these decisions matters more than their difficulty, and most of the damage in a closing is done by owners who made the right decisions in the wrong sequence.