Most small businesses that fail do not go through a bankruptcy process. A small business that operates on a cash basis, has no significant debts, or both, has no reason to consider using the bankruptcy process. Typically, a business in this category that was financed with equity will just close its doors. After paying its creditors, the residual value of the business will be distributed to the owners.
When a company has significant debt and is not able to meet its financial obligations, the owners or managers of the business will often try to gain a Voluntary arrangement for a reduction in debt payments. This is an early step in simplifying, closing down the business, or selling it. The arrangement might include changing existing terms such as rescheduling payments to stretch them out (an extension), reducing the interest rates, and compromising creditor positions or amounts (a composition).
Voluntary settlement in business close down:
A voluntary settlement buys time for you to close down or sell the business in an orderly manner. The primary advantages you will gain from a voluntary settlement are limiting adverse publicity, allowing for continued business relationships, permitting great flexibility, and requiring lower administrative costs than a court-supervised bankruptcy. Because tax laws require companies to report forgiven debt as income unless they are in bankruptcy, arrangements must be made with an eye to the tax consequences as well as to how they might affect creditors in bankruptcy.
Voluntary restructuring in business close down:
Voluntary restructurings can sometimes be treated as preferences, and voided if the company ultimately goes into bankruptcy. If a company declares bankruptcy within 90 days of a voluntary agreement, the court may conclude that the compromise was a preference and void it. Another potential problem is that if a group of creditors accepts a voluntary plan but the company later files a bankruptcy petition anyway, the creditors’ original claim has been consensually reduced. The reduced amount becomes the basis for further reduction in the subsequent bankruptcy proceedings.
WATCH THIS: One creditor that should always be settled with before shutting down the business is the Internal Revenue Service. Although the Internal Revenue Services (IRS) may negotiate about income taxes, it is particularly severe in recovering employee withholding taxes that were not paid. Because you, the financial officers, and the directors of the business may be personally liable for these taxes, it is always important to make sure that any withholding-tax issues are cleared up with the IRS before closing the doors.
The five basic steps in a closing down a business are:
There are various steps involved in closing down a business. The most important and essential steps of them are as follows.
- Step one is to convert as many of the assets of the business as possible into cash, using the cash to pay the liabilities. This is usually accomplished by letting the assets convert into cash in the normal course of the business while avoiding new liabilities. Receivables are collected, inventory sold, employees released, and new purchases avoided.
- Step two is to set a formal date for closing down and to notify customers, suppliers,and various legal authorities – such as the IRS.
- Step three is a final sale of the non-cash, non-liquid assets of the business, such as the remaining inventory and equipment.
- Step four is the final closure of the business on its last day, including returning the keys to the landlord if a lease is involved and cutting off the utilities.
- Step five is the completion of final tax returns and other legal documents, such as the papers closing the corporation or LLC with appropriate state authorities and the surrender of business licenses to local government authorities.