How to close a business

There comes a time when even the most resilient business owners must consider shutting down their venture. If company dissolution becomes the most suitable option, it’s important to confront that difficult reality quickly and avoid creating a situation that is messier than it needs to be.

Preparing for business dissolution

When a company is nearing the end of its cash runway, many startup founders overlook their fiduciary responsibility to the company to maximize the value of remaining assets. Start the dissolution process at least three months before you plan to run out of cash to ensure a smoother transition and mitigate the complexities with insolvency and the risk of personal liability.

Calculate cash runway

Start by calculating your burn rate and runway, which refers to the length of time your startup can operate with its current resources before running out of money. Your runway should encompass not only day-to-day expenses but also any outstanding liabilities.

Assess liabilities

Take stock of your liquid assets to gauge whether they can cover ongoing operating expenses and outstanding liabilities. Consider all liabilities, including taxes, payroll, outstanding vendor contracts, and, if applicable or prudent, refunds to customers for early termination. 

Consider wind-down costs

In the process of shutting down your startup, factor in the expenses associated with winding down operations. These include service provider fees (e.g. legal advisors and accountants), filing fees, taxes, and employee severance.

Seek professional advice

Use your network of trusted advisors and lawyers early in the process to ensure you're making a well-informed decision.

Communicating with investors and other stakeholders

While the decision to close the company may be disappointing for stakeholders, handling the communication with empathy, integrity, and professionalism can help preserve relationships and protect your reputation in the startup community. Effectively communicating your decision to close the company is essential for fulfilling your fiduciary duty as well as maintaining trust and goodwill among investors, employees, and other stakeholders.

Investors

Surprising major investors with the decision to dissolve your startup should be avoided at all costs. It's crucial to engage them early in the decision-making process—this entails transparent discussions about the challenges the startup is encountering and the potential solutions being explored.

Once all avenues have been explored, come to a mutual agreement on the decision to dissolve and agree on a plan for the winding-down process and distributing assets (if any remain). Maintain open communication with investors throughout the process.

Employees

Show gratitude for employees’ contributions to the company and offer explanations regarding why the decision was made to dissolve. Provide tactical guidance on next steps including: layoffs, timing for final payroll, information on any available benefits or severance packages, and assistance with the transition to new employment opportunities, if possible.

→ What happens to vested stock and equity when you leave a company?

Customers

Similar to employees, customers should be thanked for supporting your company and be provided with a brief explanation as to the reasons behind the decision to shut down. Where possible, attempt to deliver any outstanding services or products. If this is not feasible, you’ll need to formally terminate any outstanding contracts or agreements and provide clear instructions for any necessary transitions, refunds, and data migration. In addition to communications to each customer, a clear and concise statement announcing the closure should also be shared across your website and socials.

Vendors

Terminate contracts and services with vendors as soon as possible to avoid incurring additional costs. Negotiate payment arrangements or settlements where possible. If a settlement is reached, be sure to obtain a release, such as a formal release of liability.

Steps to closing a startup

After preparation and stakeholder communications are complete, actually shutting down a business involves a complex series of legal, tax, and operational steps. Every company shutdown is different, with important nuances to consider—there’s no one-size-fits-all process. As a starting point, here’s a high-level breakdown of the key actions you will likely need to take, specifically focused on Delaware C-Corporations:

Create a Plan of Dissolution

Draft a Plan of Dissolution (or Articles of Dissolution if you’re closing a limited liability company) outlining the steps and procedures a company will take to wind down its operations, settle its debts, and distribute any remaining assets, if any, to its shareholders.

Obtain board and stockholder consent

Formally obtain approval from both the board of directors and stockholders to dissolve the company according to the Plan of Dissolution above.

File corporate dissolution paperwork

File a Certificate of Dissolution with the Delaware Division of Corporations and pay associated filing fees. This document typically includes details such as the corporation's name, date of dissolution, and confirmation that all legal obligations have been fulfilled. Delaware requires you to pay all outstanding franchise taxes and make all annual reports prior to filing for dissolution.

Place publication ad

In some cases, you may need to publish notice of the dissolution in a newspaper as required by Delaware law. Check with the Delaware Division of Corporations or legal counsel to confirm if this is necessary for your specific situation.

Withdraw foreign qualifications

If your Delaware corporation is qualified to do business in any other states (meaning it's a foreign corporation that is doing business in those states), you'll need to file a withdrawal of foreign qualification with each of those states. This typically involves submitting a form to the Secretary of State or equivalent office in each state where your corporation is qualified to do business. The exact process and requirements vary by state.

File final tax returns to the IRS

File final tax returns for the company, including federal tax returns ( Form 1120), state tax returns (if applicable), and employer tax returns. Be sure to accurately report all income, deductions, and credits for the final tax year of operation and indicate that this is your final tax return to the Internal Revenue Services (IRS).

Settle tax obligations

Settle any outstanding tax liabilities owed by the company, including income taxes, payroll taxes, and sales taxes. This may involve filing final tax returns and paying any taxes owed to federal, state, and local tax authorities. In addition to penalties and fines, founders and directors could be personally liable for any outstanding debts and liabilities.

Submit final Delaware Franchise Tax and Annual Report

Before dissolution, you must ensure that all Delaware Franchise Taxes are paid, including for the partial year in which the dissolution occurs. You must file the final Franchise Tax and Annual Report with the Delaware Division of Corporations.

Operational actions

There are several operational steps to take when dissolving a company.

Company dissolution alternatives

If none of the below options are viable, shutting down your company may be the only option. While this is undoubtedly a difficult decision, it's crucial to recognize when it's time to cut your losses and move on to new opportunities.

Pivoting

Assess whether your startup's current business model is sustainable or if there's an opportunity to pivot to a new direction. Conduct market research, gather feedback from customers, and explore alternative revenue streams or target markets that align better with your strengths and market demand.

Acquisition

If your startup has valuable assets, technology, or intellectual property, it may be an attractive acquisition target. Explore potential buyers and negotiate terms that provide the best outcome for your team and investors.

New funding

Consider reaching out to existing investors or seeking new funding sources to inject capital into your startup. This could involve pitching your startup to venture capitalists, angel investors, or strategic partners who believe in your vision and are willing to invest in its success.