Lifecycle of a Small Business: Winding Down or Transfer of Business 

It’s hard to imagine your business carrying on in the world without you or the prospect of having to one day close your doors, but it’s a reality that you’ll need to face, one way or another. In this blog we’ll attempt to highlight some of the more common ways a business can come to an end and how you can adequately prepare for that end now, at the very beginning of your business’ lifecycle.  

Going out of business 

We’ve seen it a lot in the last couple of decades: the toll the economy has taken on small business owners has certainly not gone unnoticed. The Huffington Post reports that between 2008 and 2010, during the height of the recession, more than 170,000 small businesses closed their doors in the United States. Small businesses aren’t alone in shouldering this burden: Sears’ Corporation recently filed for Chapter 11 Bankruptcy after it failed to make a sizable debt payment to its collectors. What options are open to small business owners in the event that they need to shudder their doors?  

• Bankruptcy 

We hear about businesses both small and large filing for bankruptcy. But what exactly does it mean? Bankruptcy is a term used when a person or business cannot repay its outstanding debts. In order to file for bankruptcy in Maryland, you’ll need to collect all the necessary paperwork: itemization of your current income sources, major financial transactions over the last two years, monthly living expenses, debts, property and tax returns from the last two years. Once you have all of that put together, you or your attorney will need to file a petition and several other forms with Maryland’s Bankruptcy Court. 

• Dissolution of an LLC 

To dissolve your state-registered LLC will end its existence as a registered entity and will put it beyond the reach of creditors. To dissolve your LLC, you may need to turn to your company’s formation documents for guidance. These documents should contain instructions for how to properly dissolve the company as previously agreed upon by its members. You may also need to file articles of dissolution with the Maryland Department of Assessments and Taxation (SDAT). You’ll also need to designate one or more members of the LLC to handle the “winding up” of the business, which is the second and final part of dissolving an LLC. Key winding up tasks include: distributing assets to creditors and distributing any remaining assets to LLC members in proportion to their capital contributions to the company. 

• Dissolution of a Corporation 

The general rules for voluntary dissolution of a corporation can be found in Maryland’s General Corporation Law (GCL). According to the GCL, there are two methods to dissolve a corporation voluntarily: action by the board of directors followed by a stockholder vote and written consent from all stockholders. Prior to filing articles of dissolution with SDAT, you’ll need to give 20-days written notice to all of your creditors. Just as with an LLC, even after dissolution, your corporation will continue to exist for the sole purpose of completing the necessary “winding up” tasks. These can include finishing out existing contracts, distributing or selling assets accordingly, etc.   

Death of an Owner 

When the sole proprietor of a small business dies, the business ceases to exist, even if the beneficiaries decide to keep the doors open. Winding down the business will fall to the authority of the Executor, as named by the decedent’s Will. The Executor will need to present a copy of the decedent’s Will and certified copy of the death certificate to the probate court in the state where the deceased lived and operated his/her business. A list of personal and business assets and liabilities will need to be made available to the probate court as well. The Executor will then need to refund any money to clients who paid in advance for services they will no longer receive as well as collect any outstanding debt from clients who have not paid in full for services they previously received.  Last, the Executor will need to pay off any and all remaining debt with the assets of the business and then distribute any remaining assets to the beneficiaries in accordance with the Will.  

Sale 

You may decide at one point that you need to step away from the business, but wish it to remain open. In that case, selling your business may be a viable option for you. You’ll first need to obtain a valuation of your business so that you can appropriately price your business to potential buyers. You can do this on your own, or obtain the help of a professional business appraiser. You’ll also need to value any and all property or real estate that are tied to your business. To officially sell your business, you’ll need to draft a Sales Agreement. This document allows for the purchase of assets or stock of a corporation. Consult the help of your attorney and have him/her review your sales agreement to make sure it all looks good.  

Lingering Debt after closure 

It’s likely that when your business closes, it will have a lingering pile of debt still tied to its name. It will be up to you to determine how you want to take care of this debt. You can either: pay all bills in full if you’re able, settle them for less than full payment, or consider bankruptcy as we mentioned above. When considering how best to repay your debt, prioritize it all first. Employee benefits and wages and loans for which you are personally liable should top the list. If there is money left over in the bank after settling that, start chipping away at your remaining debt.