By: Idan Ghazanfari
Many self-started businesses are built with a personal touch. Each grows as the person who founded the business grows alongside it. Often the two identities can merge. This is why the end of a business can be so difficult and emotionally charged for some.
Imperatively, however, neatly wrapping up this process requires level decision-making. The last stages of a business’s life cycle can carry different legal implications. Generally, these stages can be subdivided into four main categories: 1) Closing your business; 2) Selling your business; 3) Transferring ownership, and 4) Filing for bankruptcy or liquidation.
closing your business
Depending on what type of business entity you have established, your requirements for closing that particular entity may differ. Sole proprietorships may be closed by the lone decision of the owner. Conversely, partnerships require an agreement of co-owners to close (forced dissolution is a separate partnership consideration that will not be discussed in the scope of this post). Next comes a bevy of administrative, reputational, employment, and financial considerations. This is generally applicable advice for successful businesses at any stage of its life cycle but be sure to scrupulously maintain records – documentation is always key! More or less, you should follow these steps:
- Decide to close your business and evidence it with a written document that adheres to your company’s articles of organization (if applicable).
- File dissolution documents with any state your company is registered in. If not, be prepared for future unwanted taxes and filing requirements.
- Cancel any unnecessary registrations, permits, licenses, and business names.
- Make sure to comply with all federal and state labor and employment laws. The Worker Adjustment and Retraining Notification Act (WARN) provides some invaluable insight.
- Cancel your Employer Identification Number (EIN), notify federal and state tax agencies, and prepare final returns. This IRS checklist for closing a business is handy!
selling your business
Best practices for selling your business dictate completing a valuation prior to marketing to prospective buyers. There are several common valuation methods to choose from, including the income approach, market approach, and assets approach. The income approach individually considers the business you are selling. It looks at your projected revenue while contrasting potential risks. This method is best for capturing the unique value of your company. The market approach, however, looks to similarly situated businesses that were recently sold. This history can provide an easy benchmark to base your company’s valuation. Finally, there is the asset method. This method is the most classic “accounting style valuation.” It simply subtracts total business liabilities from the total value of assets. For larger companies, some variation of all three methods should likely be used. For small companies, however, it is important to pick the right valuation method that accurately reflects your business’s value.
Although not the cheapest, the safest way to accurately value your business is by bringing in a qualified business appraiser. Additionally, having a third party come in will help remove inherent biases. Valuing a business this way may be more expensive but it is the most likely to accurately assess the value of hard to calculate assets, including brand value, intellectual property, customer lists, and future projected revenue to name a few. Finally, do not forget about the sales agreement! This document is vital to legally transition to the next owner. Make sure not to leave out any assets or liabilities as this can create lingering problems. If there is a single step in this process not to overlook or spare expenses, it would be this one. An attorney should look over the sales agreement prior to execution.
transferring ownership
Perhaps you do not wish to outright sell your business because it has been in the family for quite some time and you merely wish to pass it on to the next generation. Or perhaps you simply want an extended break and wish to travel for a year without the day-to-day restrictions of operating your business. Or perhaps you are thinking of planning ahead for arrangements to be made in the event of an unexpected passing. The wide umbrella of “transferring ownership” provides flexibility and contemplates both these scenarios.
This solution to ending (or momentary ending) your business responsibilities seems like the most worry-free, no strings attached approach. Be careful! Transferring ownership may trigger estate and gift tax considerations. Checking with your corresponding state tax laws upfront can save massive headaches later on down the road. To that end, Pennsylvania’s Department of Revenue provides an incredibly helpful page that explains the inheritance tax and its ramifications. That page can be found here.
filing for bankruptcy/liquidation
This course of action should be pursued as somewhat of a last resort. For the most part, it requires a team of professionals. Bankruptcy and liquidation are best accomplished through solid planning. Lawyers, accountants, and creditors should all be informed and involved. Once again, taxes are a critical consideration here. The IRS Bankruptcy Tax Guide helps to make this complicated information as straight forward as possible.
This post was originally authored on March 18, 2020, and can be found here.
Idan Ghazanfari is a recent graduate of Penn State Dickinson Law. He is currently working for Salzmann Hughes, P.C. out of its Harrisburg office, focusing primarily on environmental and municipal legal matters.
Sources:
[1] https://www.doleta.gov/programs/factsht/WARN_Fact_Sheet_updated_03.06.2019.pdf
[2] https://www.irs.gov/businesses/small-businesses-self-employed/closing-a-business-checklist
[3] https://www.sba.gov/business-guide/manage-your-business/close-or-sell-your-business
[4] https://www.thebalance.com/business-valuation-methods-2948478
[5] https://www.irs.gov/businesses/small-businesses-self-employed/estate-and-gift-taxes
[6] https://www.irs.gov/publications/p908
Picture Sources:
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