Small businesses account for over 90% of businesses in the United States. It’s a vital part of the American economy and contributes to job creation and economic growth. Small businesses create two out of every three net new jobs in the US economy each year. In addition, small businesses represent 98% of all firms exporting goods and services from the US and produce 13 times more patents per employee than large patenting firms.
Failed businesses are a part of the economy and can provide valuable lessons for other entrepreneurs. While it’s always unfortunate to see a business fail. They’re an essential part of the process. Some entrepreneurs usually bounce back from this, utilizing previous assets to start a new business in the future.
Many business owners agree that the dissolution of a business isn’t the end of their company. Instead, it’s merely a time of transition. Here’s everything you need to know when dissolving your business.
It’s a Common Process
Dissolutions are more common than people think. The Bureau of Labor Statistics claims that 20% of businesses don’t make it to their second year. And by the 10-year mark, 50% of companies have failed.
These numbers may seem bleak, but they’re not that surprising. After all, starting a business is a risky endeavor. And with any new venture, there’s always a chance it won’t work out.
There are many reasons why businesses dissolve. It could be due to poor management, lack of capital, or bad luck. Whatever the reason may be, don’t take it personally if your business doesn’t make it.
The Process of Business Dissolution
When dissolving your business, you need to go through the formal and legal process. The first step is to affirm the choice of dissolution among shareholders.
Approval of Shareholders
Shareholders take up different roles in a company. They can be the founders, employees, or even investors. But regardless of their role, they all share one common characteristic: they own a part of the company.
In most cases, shareholders need to agree to dissolve the business unanimously. If even one shareholder disagrees with the decision, the dissolution won’t go through.
However, there are some exceptions to this rule. For example, if your company is public, you might only need a majority vote to dissolve it. If a dispute needs to be settled, you might have to hire a business attorney to solve it. They can ensure that every shareholder is on the same page regarding the dissolution.
For a sole proprietorship or a partnership, the owners’ decision to dissolve the business is good enough, making it a faster process than corporations.
Secure a Certificate of Dissolution
The next step is to file a Certificate of Dissolution with the state government. This document officially declares that your business is no longer operating. It’s also proof that you’ve gone through the proper channels to dissolve your business.
To get a Certificate of Dissolution, you need to fill out the required paperwork and submit it to the state government. The process is different for each state, so be sure to research what you require.
You might also need to pay a filing fee when submitting your paperwork. The cost is usually around $100, but it can vary from state to state.
Settle Debts and Obligations
The next step is to settle any debts or obligations your business might have. This includes paying off loans, returning investments, and fulfilling contracts.
You need to make sure that all of your debts are paid off before you can officially dissolve your business. If you don’t, creditors could come after you for the money that you owe them.
To do this, you need to create a plan on how you’re going to settle your debts. This plan should include a timeline of when you’re going to pay off each debt. It’s essential to be realistic when creating this plan, as you don’t want to miss any payments.
If you can’t pay your outstanding debts, then you can’t dissolve your business. Instead, you’ll have to file for a Chapter 7 bankruptcy. Filing for bankruptcy means that most of your business’s assets will be given to creditors to ensure that they’re paid off and won’t chase after you.
Filing for bankruptcy can be a wise choice if you want to protect your assets. However, this also means you’d have to reset your credit score and rebuild it again.
Distribution of Assets
If you paid off your creditors and didn’t have to file for bankruptcy, it’s time to distribute your assets. This includes things like money in the bank, inventory, and office equipment.
The first step is to create a list of all the assets that your business has. Once you have this list, you need to determine who gets what. This can be decided by shareholders, owners, or even employees.
After you’ve determined who gets what, you need to start the process of distributing the assets. This can be done by selling off the assets and giving the money to the people who are entitled to it. Or you can give them the assets outright.
Either way, you need to make sure that everyone gets their fair share.
File the Final Tax Return
The last step is to file your business’s final tax return. This needs to be done even if your business is no longer operating.
To do this, you need to fill out a tax return form and submit it to the IRS. The forms can be found on their website, or you can get them from a tax professional.
Be sure to include any information about debts or obligations that you settled during the dissolution process. This will help to reduce your tax liability.
After you’ve filed your final tax return, you’re officially done dissolving your business. Feel free to start a new business from the return of investments you’ve made from your previous business.