How to Close a Business

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Deciding whether to close your business or keep operating is a real fork in the road. It’s easy to label yourself as a failure or loser since our culture teaches us that a quitter never wins and a winner never quits. However, choosing to close your business isn’t necessarily quitting, nor does it mean you failed. It could mean simply moving on and giving yourself a chance to venture into something new. On the other hand, you may have no choice in the matter due to issues we will discuss.

If you are thinking of closing your business, you shouldn’t just close shop and walk away. Doing so tarnishes your reputation and may lead to legal disputes from stakeholders or creditors not fully compensated. You also risk unnecessary fees or penalties from parties that think your business is still operational, for example, failing to file your tax returns.

Tips and Insights for Formally Closing a Business

There is a right way to close your business; a way that doesn’t tarnish your reputation or expose you to legal disputes and unnecessary charges. This post will provide tips and steps for properly closing a business and the reasons for going down this road.

Reasons for Closing a Business

There are many motivations to close a business. Some are personal, while others are due to circumstances beyond your control. Let’s explore why you may decide to close your business and move on.

1. Burnout

Starting and managing a business takes significant time and investment. The process can drain your energy and leave you feeling mentally and physically burnt out. You may also start feeling demotivated by the daily motions of running and growing the business. This exhaustion causes some entrepreneurs to move on to something new, probably one that will not drain them completely.

2. Incompetence

It could be that you or your business partners don’t possess the skills crucial to running the business. For example, a software business needs someone who knows about software and technology. Another case of incompetence is when the entity lacks a skill crucial to its success. You and your partners may be skilled at software development but know nothing about marketing the software and getting customers.

3. Lack of Capital

Lack of capital is one of the main reasons why businesses fail. Every business requires money to operate and grow. If you don’t have funds nor any access to them, you won’t be able to finance your operations. The alternative will be to halt operations altogether.

4. Poor Timing

Poor timing means loss of capital. It implies a lack of customers. If your business is ahead or past its time, it won’t get as many customers and thus will struggle to generate revenue. Bad timing can cause an otherwise good business with a unique product to fail in the market.

5. Market Factors 

Some businesses close down because they cannot reach their target customers. Others fail because they can’t fairly compete with competitors in their industry. Such market factors can cause your business to fail despite your desire to make it succeed.

6. Personal Reasons

Some personal life choices might require you to close your business. For example, if you run a sole proprietorship and want to relocate to another state or country, you may have to shut your business down. Some entrepreneurs do it because they want to pursue something new.

Exit Options

Now that you’ve decided you want to close your business, what are your exit options? Closing doesn’t necessarily mean selling your assets and filing articles of dissolution. There are other ways to shut down the business. It depends on the circumstances causing you to close.

1. Selling or Merging

One exit strategy for closing a business is selling it to another entity or entrepreneur. There could be someone else interested in growing your business. They may have the capital and resources to make it happen.

2. Liquidating

Liquidation is one of the most common ways to close a business. It’s the process of turning your assets into cash and using the money to pay off anyone owed by the entity, including owners.

3. Declaring Bankruptcy

Declaration of bankruptcy may also mean you close your business, depending on the specific circumstance. For example, if your entity sells products, the trustee may decide to acquire your inventory and use it to pay creditors. If the business is sellable, the trustee can take over and search for someone to buy your business.

Businesses that are likely to close when declaring bankruptcy include:

  • Product-based businesses
  • Entities where you own 100% of sellable shares
  • Businesses with sellable assets

4. Scaling Down

If your business is a parent to many small businesses, you can close some of them to scale down operations. The steps to shut down the businesses will be the same, with a variance of one or two.

How to Decide on Closing a Business

Deciding whether or not to close your business can be difficult. It’s a decision you should contemplate, not act on impulsively. There is a likelihood that your choice won’t impact only you but also your employees, business partners, investors, and customers.

If you are at a crossroads on whether to close your business or not, here is our advice to you:

  • Talk to your CFO or accountant

Your CFO or accountant is the best person to advise you on matters regarding finances, especially if the reason you want to close is due to a lack of capital. This professional can help you understand your options. If your CFO offers you no solution on how you can save your business, then the other alternative is to close.

  • Perform analysis or scan of the business

Evaluate how your business is performing. Do you see any progress from previous years or quarters? Your business doesn’t have to be 100% fine, but if you notice that there is progress, then it might be worth it to keep fighting.

If you can’t see any improvement or if the situation keeps getting worse, this may be a sign that you should close it.

  • Meditate on the decision

As mentioned above, you can close your business for personal reasons. In this case, you need to think about what you truly want. Listen to your heart. Does it tell you to move on to something new, or does it whisper that you keep fighting?

As the quote by Marie Forleo goes, “When it comes to forks in the road, your heart knows the answer, not your mind.” Follow the path that’s your true heart’s desire. If that path means closing your business, so be it.

Benefits of Closing a Business the Right Way

There are benefits to closing a business the right way. They are:

  • Gives employees time to find another job

By notifying your employees about closing your business in advance, you give them time to search for another job. They are not left stranded. You also avoid lawsuits from workers who believe they got unjustly laid off.

  • Lets owners walk away with something

After liquidating your assets and paying off all liabilities, the cash that remains in the business is yours to distribute amongst shareholders. At least you and other owners in your business will walk away with something. It won’t be a total loss.

  • Maintains good relationships with lenders and investors 

By closing a business the right way, you maintain a good relationship with lenders and investors. They may consider investing in your new venture if you choose to open another entity.

  • Offers peace of mind

Closing a business the right way gives you peace of mind. You can finally walk away without worrying whether creditors will look for you or employees will sue you. You will finally be free to venture into something else without the baggage.

Steps to Close a Business

The steps to close a business may differ depending on your needs an exit strategy. The timeline may also vary depending on the size of your business. A sole proprietorship with one employee is simpler to close than a partnership with multiple stores.

1. Conduct cash flow projections

The first thing you need to do is determine how long you can remain in operations. Do this by creating new cash flow projections. How long will your business survive with the money you currently have? A cash flow projection will help you figure out the timeline you have to close your business.

2. Create a closing checklist

Work together with your accountant or CFO to create a business closure plan. You will use this document as your timetable or checklist to ensure you perform all activities related to closing your business. This plan will help ensure you don’t forget anything during the closure process.

3. Choose an exit strategy or option

The good thing about formally closing your business is it allows you to select an exit strategy. If your business is sellable, consider choosing this as your exit strategy. Another approach may be to shut down the business entirely.

Your exit strategy will determine the steps to follow when shutting down. Just a quick note, our article provides you with tips to close your business by selling off assets. The measures may vary for other exit strategies.

4. Inform employees

Let your employees be the first ones to know that you want to close the business. Tell them in person so that they fully comprehend the situation. It’s crucial that you notify your employees at least a month or two before closure so they can start looking for employment elsewhere.

5. Collect accounts receivables

Next up, develop a strategy to collect all outstanding accounts receivables. You can offer discounts to motivate debtors to pay you quickly. Don’t announce your plans to close the business because this may encourage some debtors to delay paying you. It will be hard to collect receivables after you shut down operations.

6. Inform creditors and pay any outstanding payables and debts

Notify your suppliers, creditors, and any other lenders and make plans to pay them any outstanding liabilities. You can use your collected accounts receivables or cash from liquidated assets to cover your payables.

7. Notify customers and finish incomplete projects

Another difficult discussion you will need to have is with your customers. Some may have come to depend on your product or service. They now have to search for a new vendor. You should tell them early enough for them to make alternative arrangements and complete any pending projects.

8. Liquidate business assets

Hold a “going out of business” sale to sell any remaining inventory and business assets. You can use the cash to pay creditors and employees and distribute the rest to your shareholders.

9. Terminate leases

If you have any ongoing leases, for example, equipment or property leases, give notices to terminate them.

10. Cancel permits and licenses

Cancel all permits and licenses you have from the federal, state, or county government. Also, cancel ongoing insurance policies such as worker’s compensation cover and liability insurance.

11. Close business bank accounts

Close all business bank accounts once you withdraw your cash from the bank. Also, cancel any lines of credit and any other credit accounts.

12. File article of dissolution

If you have registered your business as a limited liability company (LLC) or corporation, you’ll need to file articles of dissolution with your state of registration. Failing to submit this document may expose you to paying ongoing taxes and other charges. The requirements for filing articles of dissolution may vary from one state to another, so it’s best to confirm with your secretary of state.

13. Submit final tax return and payroll forms

You also need to file your final tax return and submit final sales tax and payroll forms to your state or federal government. Also, remember to cancel your employer identification number (EIN).

14. Distribute remaining assets to owners

Finally, hold a meeting with other shareholders in your business and distribute any remaining cash and unsold assets. Distribution should come last after paying your employees and any other liabilities. After this step, you and other shareholders will be free to part ways.


While it’s true that no entrepreneur starts a business intending to close it, unavoidable circumstances may force you to shut down. When that moment comes, take some time to reflect on your decision before beginning the closure process.

After you close, consider taking time off to mourn and think as you plan your next move. The closure of your business could be the beginning of something better and exciting.