Most owners who decide to close do the first half of the job. They stop taking orders, let the staff go, and turn off the lights. Then the letters start: the bank, the landlord, the vendors, the Franchise Tax Board. A business that has stopped operating has not stopped existing, and a company that is simply abandoned keeps generating taxes, penalties, and lawsuits for years.
An orderly wind-down is the other half. It is the process of ending the company’s obligations in a deliberate order, protecting the owner from personal exposure along the way, and then closing the entity so that it is legally finished.
Sometimes that can be done entirely out of court. Sometimes it ends in a Chapter 7 filing for the company. This article follows a business closure in the order it progresses.
What the Owner Is Personally Exposed To
A corporation or LLC generally keeps its debts to itself. The owner’s personal exposure comes from a short list, and the whole wind-down is planned around it.
- Personal guarantees. Bank loans, credit lines, and commercial leases almost always carry one.
- Trust fund taxes. Payroll taxes withheld from employees and sales tax collected from customers can be assessed against the people who ran the company.
- Unpaid wages. California can hold owners and officers responsible for wages the company failed to pay.
- Money taken out at the end. Paying yourself or a relative ahead of creditors while the company cannot pay its debts can be undone and can create personal liability.
Everything else, in most cases, ends with the company. Knowing which debts are which tells us where the available money should go first.
The Decision
Understanding what the company owns and owes before it closes, so the closure follows a plan.
A full picture
We start with a simple inventory: what the company owns, what it is owed, what it owes and to whom, which of those debts the owner guaranteed, and which tax returns and agency reports are behind. Most companies in trouble do not have a current list of their own creditors. Building one is the first task.
Solvent or insolvent
If the company can pay everyone, closing is mostly paperwork. If it cannot, the order in which money goes out matters a great deal, and so does the question of whether a bankruptcy filing may be needed at the end. We answer that question at the start, because it changes what may safely be paid in the months before.
Authority and a last day
The owners or the board adopt a written resolution to cease operations and wind up, and the company picks a last day of business. Several agencies later ask for that exact date, so it should be decided, not remembered.
Shutting Down
Stopping operations without creating new liabilities on the way out.
Employees
In California, final wages, including accrued vacation, are due on the employee’s last day. This is the one bill that should never be left for later. Final payroll tax deposits and returns follow.
Customers, vendors, and a closure notice
Customers with open orders or deposits are told what will happen to them. Vendors and other creditors receive a short, uniform notice that the company has ceased operations and is winding up. The notice does not admit any particular balance.
Assets and receivables
Money owed to the company is collected. Inventory and equipment are sold for fair value to unrelated buyers where possible, and the sales are documented. A sale to an owner or a relative at a discount is the kind of transaction that gets examined later.
- Do not simply walk away. An abandoned company keeps owing the annual franchise tax and keeps getting sued.
- Do not pay yourself, a relative, or a favored creditor first.
- Do not let insurance lapse while the company still has property, vehicles, or employees.
- Do not close the bank account until the last check has cleared and the last refund has arrived.
The Big Three: Lender, Landlord, Taxes
Resolving the obligations that carry the owner’s personal exposure.
The lender
A guaranteed bank loan or credit line does not go away when the company closes. It is negotiated or paid, and when it is paid we obtain written confirmation from the bank that the obligation is satisfied. Where co-borrowers or guarantors contribute unequally, that is documented between them as well.
The lease
A commercial lease with years left on it is usually the largest single exposure. Landlords often prefer a negotiated surrender to a lawsuit against an empty company. A typical resolution is a fixed payment, the security deposit, the keys, and in exchange a written termination of the lease and a release of the personal guarantee.
Taxes and agencies
Every past-due return is filed, including for years the company had no income. That covers the IRS, the Franchise Tax Board, the EDD for payroll, and the CDTFA for sales tax, along with any industry regulator the business reports to. Filing does two things: it stops estimated assessments from growing, and it starts the clocks that eventually limit what the agencies can collect. Where a balance is owed, we ask for a collection hold while the wind-down proceeds.
Creditors
Dealing with everyone else consistently and from a single point of contact.
One schedule
Every demand letter, invoice, and collection notice goes onto one creditor schedule: who is owed, how much, on what basis, and who is collecting. Patterns appear quickly. One collection agency often holds several of the company’s accounts, and one conversation can then cover a large share of the total.
One voice
Once we are engaged, creditors are told to direct their correspondence to our office. The owner and the staff stop fielding calls, and the company stops making inconsistent statements to different creditors.
Who gets paid
If the company has money left after wages and taxes, it is applied to creditors in a defensible way, and settlements are documented with written releases. If it has none, creditors are told so plainly.
A payment the company makes to one creditor in the 90 days before a bankruptcy filing can be recovered by the trustee from that creditor. For payments to insiders the period is a year. So when a filing is on the horizon, we look hard at who is paying and from what funds. A guarantor who pays a guaranteed debt with personal money is in a different position from a company paying the same debt.
Closing the Entity
Ending the company’s legal existence, one of two ways.
Dissolution
When the debts have been paid or settled, the company files final tax returns marked as final and files its dissolution papers with the California Secretary of State. A company formed in another state also withdraws its registration here and dissolves at home. Done in the right order and on time, this stops the annual minimum franchise tax. Permits, licenses, and agency accounts are closed, and the bank account is closed last.
Chapter 7 for the company
When there are more creditors than money and no realistic way to settle with all of them, the company can file Chapter 7. A trustee takes over what is left, sells it, and distributes the proceeds under the Bankruptcy Code. A corporation or LLC does not receive a discharge, because it does not need one: the company is finished, pending lawsuits against it stop, and creditors have one place to file their claims. A Chapter 7 for the company does not by itself resolve the owner’s personal guarantees, which is why those are dealt with in Stage 3.
Records
The company’s books, tax returns, payroll records, and the wind-down file are kept for several years after closing. Questions do come later, and the records are the answer.
Wind-Down, Chapter 7, or Reorganization?
| Option | Best when | How it ends |
|---|---|---|
| Out-of-court wind-down | Creditors are few enough to pay or settle, and the main exposures can be negotiated. | Dissolution filed with the state. |
| Chapter 7 for the company | There are too many creditors for the money available, or lawsuits are already pending. | A trustee liquidates and the case is closed. |
| Chapter 11, Subchapter V | The business is worth keeping and would be profitable with its debt restructured. | A confirmed plan, and the owners keep the company. |
If there is a chance the business can be saved, read our Chapter 11, Subchapter V guide before deciding to close. If the owner’s own debts are the larger problem, the Chapter 7 and Chapter 13 guides explain the personal options.
What It Costs
A wind-down is usually billed by the hour, because the work depends on how many creditors there are, how many returns are unfiled, and how much has to be negotiated. We give an estimate at the first meeting once we have seen the list of obligations. If the company files Chapter 7, the court’s filing fee is $338.
- Every demand letter, collection notice, and lawsuit the company has received
- Loan and credit line documents, and anything you signed personally
- The lease and any amendments or extensions
- The last three years of tax returns, and any notices from the IRS, FTB, EDD, or CDTFA
- A list of what the company owns and what it is owed
- The articles, bylaws or operating agreement, and a list of owners and officers
Gregory Grigoryants is a California attorney (State Bar No. 286804) who has represented individuals, families, and business owners in bankruptcy, debt collection defense, and tax resolution matters for more than 13 years. He practices from offices in Sherman Oaks and Beverly Hills and speaks English and Russian.