Do you need to shut your company down? It is nobody’s dream to come to that conclusion, but it is very common, and indeed–somewhat encouraged. There is a lot to learn from business closings and the mantra “fail fast, fail often, fail forward” really does pay off. So, let’s get to work. First off – should you be closing down your business?
Reasons for closing a business
There are several personal and subjective reasons that might lead you to consider shutting down your company. These might include a desire to change direction, an unsatisfactory company trajectory, a decision to move… the list is potentially infinite. There are no right and wrong answers in this regard.
However, there are also some objective indications that you need to make the decision to close down your business. If your company:
Cannot pay its debts as they fall due, or
Does not have sufficient assets to satisfy all debts in full
It is time to start the process of business closing. You have a few options in this regard, each with their own respective advantages and disadvantages. Before you start with the process, however, it is important to have a clear view of the legal duties that rest on company officers and directors.
Fiduciary duties are, essentially, duties of care. They rest on officers and directors of a company as a result of their office. In other words, being a director or officer of a company necessarily means that you accepted certain duties of care toward the company. The exact content of your duties will depend on the type of organization, your founding documents, as well as the state in which you are incorporated. If your company is incorporated in Delaware, for example, that means that you have two duties toward the company:
A duty of due care. This requires of you to make informed, bona fide decisions that are in the best interest of the company and the shareholders
A duty of loyalty. This requires of you not to engage in self-dealing and to pursue the company’s interests above your own.
When your company has reached a point of insolvency, your fiduciary duties necessarily mean that you are required to maximize the value of the company. This is sometimes done by stopping all operations immediately, and other times by continuing operations to get more cash inflow. The content of the directors’ and officers’ duties will therefore depend on the context.
Your options for closing down a business
There are always alternatives to closing down your business, such as a sale, merger, or private settlement with creditors. This article will focus on the options available for business closing, however.
Informal wind down:
An informal wind down is not a formal end to the existence of your company. You can find buyers for your company’s assets, lay off employees, and close off any remaining business operations.
Corporate dissolution is a formal process that puts an end to the legal existence of your company. The process is governed by state law and allowed in many states (Delaware, Colorado, New York, California, to name a few). It entails winding up the operations of the company and liquidation of all assets.
The ABC Process (assignment for the benefit of creditors
The ABC process is also a formal legal process that concludes with the end of the legal existence of your company. Closing down a business with ABC has one great advantage over bankruptcy procedures: you are able to appoint a professional fiduciary (he/she does not have to be appointed by a court). The fiduciary will assign all the company’s assets and liabilities to him-/herself, and will then liquidate the assets for the benefit of the creditors. Creditors are informed of the process and invited to submit claims.
Filing for bankruptcy
There are two ways to file for bankruptcy: filing chapter 13 or filing chapter 7. Both are similar: it is a public bankruptcy that must be filed in a US Bankruptcy court. The advantage of the formal bankruptcy process is that the filing triggers an automatic stay that prevents creditors from instituting claims or from foreclosing on company assets.
In the case of filing Chapter 7 Bankruptcy, the court appoints a trustee who takes over all operations and decision making authority in the company. He/she will generally then terminate all employees, liquidate all assets, institute claims on behalf of the company, and wind down the company for the benefit of creditors and shareholders.
When filing Chapter 11 Bankruptcy , the board and management keep their decision making authority initially – as debtors in possession (DIP) of assets. Business operations continue while creditors’ claims are dealt with. For this reason, the process requires DIP funding and/or the use of a lender’s cash collateral.
Contact LawTrades today
Contact one of our experts today for affordable legal coverage designed to help you pay less and start closing down your company with confidence. Talk to a Legal Pro to find your business the perfect lawyer to ensure a seamless business closing process.