Guide to Business Shutdown Without Filing Bankruptcy

Guide to Business Shutdown Without Filing Bankruptcy

business shutdown

There’s lots written on how to start a business. Not so much about business shutdown.

Even pre-pandemic, half of all new businesses fail within 5 years. Post pandemic, the pain is so much greater.

So let’s walk through how to manage a business shutdown, tie up loose ends, and minimize problems that may follow you out the door.

What shapes our to-do list

When you’re ready to move on, shutting down the business is more complicated than just locking the door behind you.

Your shut-down list needs to address what happens to assets, business premises, payroll, taxes, and other unpaid bills.

First, who owns the business

I do, you sputter. But, this isn’t a trick question. It’s asking: is this business a

  • sole proprietorship, ownership directly by an individual
  • a partnership, ownership by several individuals in their own names
  • a corporation or LLC, a legally separate entity whose stock is held (usually) by individuals.

Answer that question, and you’re half way to knowing who is liable for any unpaid debts of the business.

In proprietorships and partnerships, the individuals and all their assets are fully liable for the business debts.

If the business is run by a legal entity, the entity and its assets are liable for the business debts. The shareholders or members are liable only if for debts that are personally guaranteed.

Find the guarantors

Because most small corporations have little financial history and few unencumbered assets, many who provide goods and services to the entity want the personal guarantee of the shareholders/members of the entity.

Guarantors agree to become equally liable with the entity for the debt in question. Shut down or bankruptcy by the entity won’t cut off the guarantor’s exposure to the debt.

Some “guarantees” are created in state or federal law, usually for taxes or payroll withholding.

So, to the extent possible, you want to reduce or pay off debts where guarantors or business insiders may have to pay any remaining balance on an obligation.

Is the entity really liable

Another wrinkle to the “who is liable” question comes up when you look at leases, phone bills, and accounts that may predate the creation of the entity.

It’s not unusual to find that the owner leased the premises in her own name, and the entity has no liability (nor ownership) at all.

Identify lienholders

Before you can deal with the assets of a failed business, you need to know which entities hold liens on those assets. Lienholders are entitled to the proceeds of the disposition of assets before the unsecured creditors of the business can be paid from those proceeds.

Bank loans and SBA loans frequently require the grant of a lien on all the borrower’s assets.

Tax liens are imposed by law.

Before you spend time and energy selling assets, make sure that the lien holder is on board with the sale, and that the sale will benefit the business by either generating excess funds, or by paying down a guaranteed debt. If not, consider abandoning the over-encumbered asset, after providing notice to the creditor.

Get out from under rent

If your business has a physical location owned by another, you need to reduce the business’s exposure to unpaid rent. You can

  • Negotiate an agreement with the landlord to surrender possession & terminate the lease
  • Sublet if permitted by your lease
  • Simply vacate and allow the landlord to mitigate damages by finding a new tenant

Which approach works depends on the business climate, the terms of your lease, and the nature of the space. But your goal is to get someone else responsible for paying the landlord as quickly as possible.

Claim refunds and deposits

Consider whether the business has prepaid for a year’s worth of insurance, software, uniforms, or whatever. As soon as appropriate, cancel the service and claim a refund for unused service.

Identify vendors who hold deposits to secure payment, such as utilities, settle the bill, and claim the balance of the deposit.

Deal with the taxing authorities

Even after your last payroll, an employer has an obligation to provide former employees with W-2’s for the period of their employment. Work with your payroll service or tax preparer to see that final employment tax returns get filed, and the W’2’s mailed out.

If you fail to tell the tax folks that you have made your final payroll, they assume that you continue in business and have simply failed to file returns. Those assumptions will create future troubles for the business managers: the IRS has penalties for individual managers who fail to issue W’2’s.

Most likely, you want to provide for a final income tax return for the business, whether it’s just a Schedule C for the owners’ tax returns, or a full blown return for LLC’s and subChapter S corporations.

IRS publication on business shutdown

Set aside the records and the money necessary to get those returns filed.

What records to keep

Even when the business is closed, and you’ve moved on, you’ll want to keep access to the business records.


  • tax returns
  • insurance policies
  • payroll records
  • accounting records

To the extent that information lives on hard drives of business computers, make a plan to preserve your access to that information. If it’s only available with a current subscription to software, consider how to download appropriate reports and summaries so the information remains accessible.

Don’t be in a hurry to

Finally, don’t be in a hurry to dissolve any business entity that’s involved.

Once an entity is dissolved, it has no officers/managers to act in its name. It can’t appear in court. It can’t open a bank account. And without a bank account, it can’t negotiate checks.

So, preserve your ability to act on behalf of the entity until you are confident all questions and issues are behind you.

Then, go forth and prosper once again.


Should this business continue?

The liability of shareholders for business debt

How corporate bankruptcy can expose shareholders

Limiting exposure to California sales tax

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Amer Mustafa

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