When starting a business, few business owners consider the details and consequences of closing the business. But even closing a business, if not done the right way, can get a business owner in hot water.
Recently, a popular and all-inclusive wedding venue in Everett, WA suddenly closed. Engaged couples with impending nuptials are without a venue and scrambling for alternative accommodations. There is no word of refunds being paid or compensation for the affected couples or the employees. And now, the impacted couples are considering a class-action lawsuit.
In most cases like this, business owners are also devastated. They didn’t intend to harm anyone – but here they are. Now, they need to figure out how to take what’s left, pay what they can, and avoid personal liability where they can.
When considering liability, there are three key tools to protect against risk: Contracts, Insurance, and Entity. Contracts are intended to create the ground rules of the business relationship and their contracts may provide some liability protection. Insurance protects against claims that are covered by the policy. The Entity protects the owners from the liability of the business except where there’s personal liability such as taxes, payroll or illegal acts.
With these in mind, what should you do if you know a closing is imminent:
Consider your contracts and obligations.
Vendor agreements, leases, warranties, employment contracts – these are just a few of the contracts that might include ongoing obligations that could impact a business’ decision to close.
In the case of the wedding venue, the business had booked weddings through 2021 that includes payments and deposits. By not returning the funds, the wedding venue may be in breach of its contracts.
Ask your attorney if there are terms that can be included in your contracts to protect you from liability if you can’t perform. Also consider operational protections you can put in place such as keeping customer deposits in a separate account in case they need to be repaid. Contracts should be reviewed and updated regularly to reflect your business practices and risk.
Review your governing documents.
Whether your company is an LLC or a corporation, it likely has governing documents (Operating Agreement or Bylaws) that discuss the winding up and liquidation of the business. It is crucial to understand what these documents say so you can take the necessary and legal steps.
If your company doesn’t have any governing documents (i.e. an Operating Agreement was never put in place), the state has default statutory requirements that will govern. Also remember that if you haven’t maintained the company separate from yourself, your creditor can pursue you personally by “piercing the corporate veil”. Managing the business as a separate “person” from yourself is critical to protecting yourself from liability.
Identify any outstanding financial obligations.
Certain financial obligations create personal liability for you as the owner, even if you have an LLC or corporation. Taxes, wages, and any personal guarantees are examples. If your financial position is at risk, calculate the amounts owed under these categories and keep them separate. If you know you’re going have trouble satisfying these financial obligations, talk with a bankruptcy attorney as soon as possible to plan how funds can and should be used and what assets can be protected.
Communicate the decision.
One of the hardest parts of the process is communicating the bad news to your employees, customers, and other stakeholders. As with the wedding venue, you usually want to keep the decision confidential until you’ve worked out the issues above. Letters and public communications are drafted so they all go out at once. When the information becomes public, you’ll have a lot of questions and claims to address and you must know your plan and a good team to support you.
File the paperwork.
Once all of the steps of closing winding up the business have been completed, you can file the dissolution documents with the Secretary of State. You may also be required to obtain a tax clearance certificate from the Department of Revenue to show all taxes have been paid to the state prior to dissolution.
Finally, always be prepared.
Whether your business is just getting started, has been running strong for years, or is considering closing its doors, it’s never too early to speak with counsel to ensure your governance documents and contracts are working for you, and to discuss risk mitigation, ownership, and the handling of assets and liabilities in the event of ownership changes or closure. Give us a call or email us at email@example.com to learn more about keeping you and your business protected.