This is a guest post by Maxime.
The decision to start a business is never easy, and the decision to end it can be even more difficult. Still, entrepreneurs closing their small businesses aren’t alone.
According to a Bureau of Labor Statistics survey published earlier this year, only 44% of small businesses make it to four years, and by conservative estimates, the recession has shuttered 170,000 small businesses; some sources say the number is much higher.
If you’re one of the many business owners faced with the prospect of closing, there are a number of personal and practical factors to consider. However, one failed business doesn’t need to end your entrepreneurship. Many successful business owners are the product of at least one failed company.
The main reasons for ending a business fall into one of two categories: financial and emotional. Above all, your business needs to be profitable. By most estimates, it can take 2-3 years for a new business to become profitable, and many hard-hit companies are still recovering from the recession.
While sinking money into your business to get it started, or to help it through a rough patch, may be necessary, it should be a temporary arrangement. You might also find that keeping your business profitable requires all of your time and energy, or that your interests have simply changed. If you’re exhausted, or your business is no longer fulfilling to you, you may want to try changing directions.
Closing isn’t the only way to end your involvement with a business. If your company is still profitable, you may be able to sell it. Or if your business is the victim of temporary conditions – the economic downturn, for example – that you can reasonably expect to change, consider going into “hibernation,” cutting your operations down to the bare bones until the economy improves. But if closing really is your best option, keep the following tips in mind:
- Follow the correct closing procedure. If you’re a sole proprietor, you can make this decision on your own. If you’re a member of a partnership, an LLC, or a corporation, however, you and your co-owners must agree to close the business and create a written record of your decision in accordance with your company’s procedures.
- Inform all relevant parties. This includes the government, and any creditors, customers, or employees you may have. Most states require specific paperwork to legally dissolve a company, often a “Certificate of Dissolution” available on the Secretary of State’s website, and many have regulations regarding the amount of notice you must give employees. Two months is typical.
- Get your financials in order. Collects any debts owed to you and pay off your creditors. You may also need to refund customers for services they expected to receive from you. Pay your employees their final paychecks within the legal time limit, including compensation for any unused leave, as your state requires.
- Cancel all of your business accounts, including your business name registration, your business bank account and credit cards, and any business licenses or permits.
- File your final tax paperwork. Check the box indicating that this is your final return. You may also have a sales tax and payroll tax obligation. Inform the IRS that you will no longer be using your EIN (Employer Identification Number).
- Distribute your contact information. Your former employees, colleagues and contacts may want to get in touch with you.
- Maintain records. Although you’re no longer in business, federal, state, or local governments may request some tax and employment information from you for years after your closing. Seven years is a good general rule; after that, you may destroy your records securely.
For more complete information, consult an attorney or any number of free, online resources; the IRS maintains a checklist of steps to closing your small business and a series helpful forms. The US Small Business Administration website is also a useful source.
Of course, closing your business doesn’t have to be your last step as an entrepreneur. There are no legal barriers to starting another business after closing one, even if your business declared bankruptcy, as long as you followed the proper procedures.
Analyze your experience with your previous business to determine your weaknesses. Did you pursue the wrong kind of advertising? Overspend on payroll or materials? Have a hard time maintaining staff? Use what you learn to refine a new business plan.
The failure of a business depends on any number of factors, and with experience, the outlook for your new business could be much more positive.
About the Author
Maxime Rieman is a writer for NerdWallet, a financial literacy site where consumers gain business and personal finance information.