How Long Does It Take To Shut Down a Startup Business?
Starting a company involves exciting steps like filing trademarks and obtaining business licenses, typically completed within weeks. But when it comes to closing a business, the process is not only longer but often lacks the initial thrill.
So, how long does it really take to shut down a company? And what are the signs that it’s time to close up shop? In this article, we delve into these questions, providing insights into the company dissolution process.
The time it takes to dissolve a company depends on its size and complexity.
Legal and regulatory compliance, proper asset distribution, and fulfilling tax obligations are some factors that prolong the dissolution period.
Continuous financial struggle and increasingly fiercer competition could be signs that it’s time to wrap up the business.
How Long Does It Take To Dissolve a Company?
On average, it takes months to years (and sometimes even more) to dissolve a company. The exact timeline depends on factors such as the industry, the number of employees, the dissolution method, and the complexity and size of the company.
The following are rough averages for how long it takes to shut down different types of companies via traditional dissolution methods:
Sole proprietorships: 1-6 months
Sole proprietorships have a relatively simple shutdown process and are the easiest to dissolve. The stated timeline accounts for settling outstanding debts, addressing tax obligations, and filing the necessary paperwork with the IRS.
Partnerships: 3-8 months
Partnerships are similar to sole proprietorships but with two or more founders at the helm. The ‘partnership agreement’ is an important document created by founders that explains the distribution of assets, profits, and liabilities once the company decides to shut down. In the event that founders did not create such a document, the default state laws highlighting standard company shut down procedures must be followed.
Despite that, disputes between company owners could arise because the terms contained within the partnership agreement lack clarity or could have multiple interpretations, which further prolongs negotiations and the dissolution process.
Limited Liability Companies (LLCs): 6 months – 1 year or more
LLCs are a step above partnerships and share a similar dissolution process (instead of the partnership agreement, the operating agreement highlights the steps that must be followed when closing the company). It takes slightly longer to terminate an LLC because of the additional steps involved, e.g., filing a Certificate of Dissolution with the state.
Corporations: 6 months – 1 year or more
Finally, S and C Corporations take the longest to close owing to their size and complexity. Company dissolution involves fulfilling numerous legal and regulatory requirements, e.g., approval from the board of directors and shareholders and filing the necessary documents with the state. Other than that, distributing assets and settling debts are standard procedures but take longer because of the number and size of stakeholders involved.
Note: The emergence of new company dissolution methods – like the one SimpleClosure provides – may reduce the shutdown process from months and years to days and weeks. More on that later in this blog.
Why Does the Shutdown Take So Long?
A typical company shutdown takes time because of the following reasons.
Following the Law
Companies are registered legal entities, i.e., the government or relevant state authorities recognize them. To shut one down, you must follow legal and regulatory guidelines, which naturally consume a fair bit of time.
Some of these tasks include settling outstanding debts, filing dissolution paperwork, and informing creditors of the imminent shutdown. Company owners who file for bankruptcy usually have to wait longer because of the legal proceedings involved.
Adhering to State-Specific Regulations
Continuing on the topic of legal and regulatory guidelines, each state has its own set of rules on how businesses are organized, function, and dissolved.
For example, some states mandate dissolving companies to notify creditors via email, whereas others require the news to be published in a local newspaper. Some states have more extended tax filing requirements than others. These differences account for the discrepancies in dissolution times across different states.
Paying off debts – even if it requires liquidating assets – is a vital part of company dissolution. The shutdown process extends for months on end, depending on the creditor negotiation process and how deep the company is in debt.
Fulfilling Tax Obligations
Settling tax liabilities and filing your final tax returns is another company shutdown prerequisite. This includes informing the IRS regarding company closure, addressing employment tax matters, settling remaining tax liabilities, and maintaining tax-related records.
Distributing or Selling Assets
Distributing assets, or the proceeds from the sale of assets takes considerable time. For partnerships, LLCs, and Corporations, asset distribution is done according to each party’s interest in the company. However, if a company files for bankruptcy or there's a dispute between the founders, the process becomes more complicated and time-consuming than usual.
When Should a Company Shut Down?
Determining the company shutdown point is challenging and varies from one business to another. But a good litmus test is to check your company’s financial health: how’s the cash flow situation? Is the company consistently operating at a loss? Is it unlikely that you’ll pay off company debts in the near-to-distant future?
Then, you should assess the market conditions. Is the competition becoming increasingly fierce, and if so, do you see yourself surviving in the coming years? Is the industry as a whole on the decline, or are there potential opportunities on the horizon?
Finally, are regulatory and/or legal changes making it harder to do business? If recent policy changes are making it harder to do business, it may be time to move to a different project.
A long and drawn-out company shutdown process is a constant reminder that things didn’t go the way you planned. And as much as you’d like to walk away and move on, there are consequences associated with improper business closure.
SimpleClosure can help with that. We leverage Fintech, Legal tech, and AI to speed up the company closure process drastically. We’re talking from months and years to potentially days and weeks!
Let’s save your time and money - get in touch today.
How Long Does It Take To Close a Business Bank Account?
Closing a business bank account can take a few days to a couple of weeks. The exact time it will take you to shut down your business account depends on factors like the type of business account, the bank’s account closure protocols, any pending transactions, the required paperwork, and the bank’s current workload.
Important Note: Consider closing your business bank account as one of the final steps in the process of shutting down your business. Maintaining your account open is crucial for settling any outstanding payments and collecting any remaining revenue. This ensures a smooth financial transition during the closure of your business.
How Do You Check if a Company Is Dissolved?
To know whether a company no longer exists, start by identifying the state in which the company was registered. Then, access the state’s business entity database website (each state maintains this) and search for the company’s name or registration number. The website will show whether the company is active, inactive, or dissolved.