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Had to Shut Your Doors? Here’s How to Deal with Business Failure

Eric Goldschein

Eric Goldschein

Eric is the partnerships editor at Fundera with nearly a decade of experience in digital media. He has written for a number of outlets including Business Insider, HuffPost, Men's Journal, BigCommerce, Volusion, Square, RetailNext, and Keap, covering entrepreneurship, finance, marketing, and small business trends. He graduated from the University of Pittsburgh with degrees in history and English writing. Email:
Eric Goldschein
Editorial Note: Fundera exists to help you make better business decisions. That’s why we make sure our editorial integrity isn’t influenced by our own business. The opinions, analyses, reviews, or recommendations in this article are those of our editorial team alone.

“Yes, the business failed. I didn’t feel like I failed, but the business did. It was something I put my blood, sweat, and tears into, that I loved, and there’s still that sense of this was my big project and now it’s gone.”

That’s according to Leslie Farrell, the former owner of Feral Films, an independent documentary production company that like countless other small businesses throughout history had to shut its doors—mostly due to forces outside of their control. Many entrepreneurs know the feeling—it’s a part of being an entrepreneur in the first place.

New entrepreneurs, however, might experience some panic. You go from having the future figured out—at least in the short-term—to a stark reality marked by breaking leases, informing employees that they need to find new work, and carving out a new path for yourself. It can be taxing, both emotionally and logistically.

The exact steps a small business owner needs to take to close the business down for good (or put it on hiatus while searching for alternative forms of financing and waiting for a better economy) vary depending on the type of business. The rules for a sole proprietorship differ from those for a limited liability company (LLC), partnership, or corporation, not the least of which being there are likely partners involved in the latter two options and they need to be consulted.

The Small Business Administration’s website has a rundown of the basic steps for closing a small business, and Ferrell’s experience mostly mirrors it. What the SBA can’t tell you is how to break the news to those you hired to carry out the company’s vision… And where to go from here.

Decide to Close the Business—Sooner Rather than Later

The first step is obvious:

Pull the trigger on closing your business if you find that it can’t remain solvent. This could be due to a number of factors. For Farrell, the determining factor was the economic downturn of 2008, which by 2009 had crystallized into a full-blown recession.

“I started Feral Films in 1999, and it was always a small company. In 2008, we had sunk all of our assets into making an independent film on the history of voting in America,” she says. “We were busy shooting through an election cycle, which coincided with the global downturn, and lost all of our back-end financing. We needed to sink all of our money into getting the project in the can so we actually had a product, but then we had to close the doors because we didn’t have any other income.”

Of course, the realization that sinking the money would mean sinking the company wasn’t lost on Farrell, and so the decision to close Feral Films wasn’t made in a day.

It was a process… One that she recommends you begin quickly if the end is, in fact, near.

“Try to come to that realization sooner rather than later. Putting it off really does make it worse. Because ultimately it’s going to be about whether you have a bottom line: You have a life and bills and things you have to do,” she says.

Resolve Your Managerial and Financial Obligations

There are two bridges that have to be crossed when closing a business. One involves having tough face-to-face conversations with people, the other involves paperwork. Neither is very pleasant.

1. Tough But Necessary Conversations to Have

Farrell notes there are two big conversations she needed to have:

One with the general manager of her building and the other with her employees.

“I had to speak to the general manager and tell him we would have to close the doors at the end of the month. It was about two and a half weeks before the end of the month and it was the middle of my lease. I was just upfront with him and told him what the situation was,” she says.

“Luckily I had a long relationship with him, I’d been at the New Yorker Hotel for eight years. So they were great and they said it was fine, they’d let me out of my lease, but I had to be out on time because they were going to rent that place right away.”

Not everyone will be so lucky, but this shows why it helps to have a good relationship with your building manager or landlord. Business owners who bought their space outright will likely have to begin the process of selling it or renting it out to other tenants. (To get started there, enlist the help of an attorney who specializes in real estate transactions.)

The next step is telling your employees that the business will be closing its doors. This, for some, will be the toughest part of the whole process.

“At that point I had four people working for me. It was hard—I had given some of them their first jobs out of college. So you have to go to everybody and tell them that you’re closing the doors, that the project you thought was going to go forward is not going to happen. And with two weeks notice it’s not a lot of time to tell people to go find other jobs, but don’t drag it out any longer,” Farrell says.

2. The Paperwork Involved

Again, this part depends on what kind of business structure you have and the specifics of your business. (Do you own your space? Do you have a warehouse? Do you need to close out utilities or simply transfer them out of your name?)

The SBA recommends the help of an expert here to identify your requirements, like lawyers, accountants, tax experts, and/or bankers. A few things that will probably need to be addressed include:

  • Dissolution documents: Papers to dissolve the business have to be filed in the state where the business was incorporated, as well as in states where that business is qualified to do transactions. Different states have different requirements about tax clearances and notifying creditors, so check to make sure what’s needed in your state.
  • Federal, state and local tax forms: You have to finalize the business with the IRS, indicating when you file income tax returns for that year that this will be the final return. There may also be additional filings for state sales tax. Don’t forget about payroll taxes for your former employees.
  • Registrations, permits and other licenses: These all need to be cancelled in order to protect your finances and reputation.

Settle Things with Creditors, Investors, and Employees

One of the first things a good business owner does is inform employees that they’ll be out of work soon. But your obligations to them don’t end there.

As mentioned above, you’ll need to continue to account for their payroll tax forms. You’ll also need to comply with all employment and labor laws, which includes paying them by their final day of work or soon after, and compensating them for any unused leave.

Creditors and other investors, if you have them, also need to be notified.

Creditors must be notified by mail, with information including: that the business is dissolving, a mailing address where they can send their claims, what should be included in a claim, a deadline for receiving claims (usually 120 days) and notice that they’ll be barred from receiving a claim if they don’t send one by the deadline.

If you accept claims by creditors, be sure to pay them. If you reject them, be prepared for a legal battle!

Move Your Things out and Pack Wisely

If you have an office, you’ll probably have things like office equipment, supplies, furniture and the other particulars of your business. Assuming these assets don’t need to be sold off to satisfy creditors, use a moving company to pack things up and move them out in a timely fashion, especially if your building manager is doing you a favor by letting you break your lease.

“I had three rooms, which had desks, edit bays, technical equipment. Office supplies, files. All of that stuff needed to be boxed up, hopefully in some sort of order so if the business could be opened again I’d have access to it easily,” says Farrell.

That last part is important:

If you have hope that your business can survive in some other capacity in the future, keep your assets handy so they can be brought back into service quickly. And as corny as it sounds, do the same with your hopes for the future: Don’t pack them away.

“You don’t give up that hope,” says Farrell. “You may have to give up your business. Try another one if you can. You may have to take a regular job in between. You don’t give up on the dream of having your own company, whatever that happens to be, but there will be times that you have to deal with the reality of failure, and that’s okay.”

Grieve for Your Business… Then Move On

Farrell kept hope alive for Feral Films specifically for a while, but wasn’t in denial about the reality she faced.

“The global economic picture became clearer by January 2009, and we really knew there was no coming back, because the documentary business was at a standstill. There was no way to get financing in any short period of time,” she says. “I had to rethink your life, and I wasn’t expecting to do that.”

“It sucks,” she admits. “I think that it still sucks and it’s been a few years. It’s realizing that something you worked really hard for has failed. There’s a real sense of loss. It’s almost like I was fired too.”

Farrell looked around the documentary space, which was devastated by the economic crisis, before settling on a “straight” job, which she hadn’t held for over 20 years. That’s when she moved from the “reducing overhead to zero” stage of shutting down the business to officially closing it. But she still has her eyes on returning to that space one day.
“I just knew I had to figure out another way, because that’s the entrepreneurial spirit. If you want to be an entrepreneur and you can’t handle failure, you’re never going to be successful because that’s just part of it.”

Eric Goldschein

Eric Goldschein

Eric is the partnerships editor at Fundera with nearly a decade of experience in digital media. He has written for a number of outlets including Business Insider, HuffPost, Men's Journal, BigCommerce, Volusion, Square, RetailNext, and Keap, covering entrepreneurship, finance, marketing, and small business trends. He graduated from the University of Pittsburgh with degrees in history and English writing. Email:
Eric Goldschein