Closing Time? Wind down options to consider when closing a business.

By: Jeffrey Lynne April 27, 2022 1:03 pm

Time to read: 5 Minutes

The decision to close a business is a tough one. And reasons for closing vary:

1. difficulty finding employees;
2. lack of a successor to continue operations;
3. a rent increase for the company’s location;
4. change in the market;
5. dispute with a business partner;
6. inability to pay creditors; or
7. want to retire or engage in a new venture

Below are potential options to evaluate when closing a business. The best course of action depends on goals, resources, and the reasons for closing. Some questions to consider:

1. Does the business have any creditors? How many? What type (tax, employee, vendor)?
2. What do I do with the assets (IP, equipment, or accounts receivable)?
3. Am I personally on the hook for the company debts? Any personal guarantees for instance?

Bankruptcy

When pressure from creditors creates the reason close, one of the first options mentioned is usually bankruptcy. But there are several types of bankruptcy.

Ch. 7 bankruptcy

This chapter of bankruptcy is known as the liquidation chapter. In a Ch. 7 bankruptcy the company and its assets are liquidated by an appointed bankruptcy trustee. While unavoidable in certain instances, this approach has numerous downsides including a loss of control over the process.

Ch. 11 bankruptcy

Ordinarily, Ch. 11 is thought of as the reorganization form of bankruptcy where the debtor emerges with its debts in a more manageable position. However, Ch. 11 bankruptcy is also used to sell the business as a going concern or through piecemeal asset sales. Thereafter, a plan of liquidation may be proposed to wind down the business. This approach is generally the highest cost; however, it may be the preferred route to maximize payments to creditors.

Assignment for the Benefit of Creditors

This state court legal process occurs when a business assigns all of its assets to an assignee of its choice.  Having the option to choose the assignee allows a business owner to select a person who with knowledge of their industry and the wind down process.  The assignee liquidates the assets and distributes proceeds to creditors.

Dissolution

Florida law provides a pathway to dissolve a business entity. The type of entity, a LLC vs an Inc., impacts the procedure.

One of the benefits of following the protocol is to limit the period of time for certain creditors to file suit against the dissolved business. Under this approach filings required by statute are submitted to the secretary of state. Additionally, notices which comply are sent to creditors of the business, if any.

Generally, this approach is the lowest cost option to close a business. Unfortunately, certain factors may limit the effectiveness of this approach. For instance, what if there is a dispute with a business partner about whether to dissolve the business? Or the business partner becomes non-responsive? Depending on the documents governing the company, this option may require Court involvement.

Next Steps

If you have decided to close your business or are assessing whether to close, then speak with a professional to understand which options are available for your needs.