Ask an Expert: Steps to closing a small business

Q: Steve, I hope you can help me. I am sad to say that the business I started with my partners has not worked out as we had hoped it would and we are forced to close the doors. Could you help me understand how the process works – what we need to do when? — Jackson

A: Closing a business is never easy, and truly, there is little I can say that would act as a balm to the pain you are experiencing. However, to anyone whose business venture has not worked out as planned, there is one thing I want you to know:

Second acts are possible.

Let me ask you a question. What do these people have in common?

• George Foreman
• Milton Hershey (Hershey's Chocolate)
• Walt Disney
• Henry Ford

The answer is that each of them filed for bankruptcy protection before hitting it big as an entrepreneur. So yes, comebacks are quite possible, even if you don't see that right now.

First things first. Here are the steps one needs to take to formally close a business:

1. Decide. Begin by making the decision — alone if you have no partners, and with them if you do — to formally close the business. Take a vote to dissolve pursuant to your business' operating documents (articles of incorporation, partnership agreement, etc.)

This is not easy for anyone, and you and your partners may disagree on the best course of action. The thing to know is that, in business as in life, sometimes the only way out of a hole is to stop digging.

2. Get a handle on your assets and liabilities. Work with your accountant, lawyer, and business partners to generate an accurate list of your possessions and obligations. Not only will this be necessary for a final accounting, but it will also be needed to create an accurate valuation of the business.

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3. Value the business. This will be necessary for tax purposes, and for figuring! out who owes and is owed what. While you may be tempted to create this valuation on your own to save money, don't. Valuing a business is an art and a science, and if you don't know the right formulas, you are likely to come up with the wrong number.

4. Go public. We have all seen them – those stories on the evening news that show a shuttered business whose owners moved out in the dead of night owing money to employees and creditors. The deadbeats!

You don't want to do it that way. Announcing the closing of your business will not be pleasant, but at least you stand a better chance of controlling the conversation if you lead it. You also need to inform your insurance carriers, utility companies, and other similar businesses of your planned closing date.

5. Negotiate obligations. Some obligations, like taxes due, are non-negotiable. And, while I hate to sound like the lawyer I am, other debts are negotiable and, strangely, you have a lot of leverage to negotiate a good deal.

Huh? You bet. You have two choices at this point: File bankruptcy or negotiate a deal. Creditors, faced with you potentially filing Chapter 7, will be keen to get something rather than nothing.

6. Liquidate the assets, pay the debts. If you choose to file Chapter 7, the bankruptcy trustee will handle this. If you don't, you need to divvy everything up and pay final obligations.

7. Prepare and pay final taxes. Both federal and state returns must be filed. This is not simple and why you need an accountant.

8. File dissolution papers with your state. Your state likely requires that you notify various authorities and licensing entities of your dissolution.

9. Close the bank account. Not much in there anyway, probably.

10. Close up shop. Sad yes, but remember, you can live to risk another day if you want.

Today's tip: According to a recent report issued by the Small Business Administration Office of Advocacy, 1 in 7 business owners in America are minorities. This fig! ure has s! hown a slight increase over the past five years, due mainly to overall demographic trends in the country during that time. The full report can be found here.