Entrepreneur

Startup fail? Here’s how to close up shop with dignity

closeupshop

This is a guest post by lawyer Ryan Bowers

In my prior post, I outlined five legal protections for founders when getting a startup off the ground. While it is always fun and exciting to talk about the beginning of a new venture, what about the end? Let’s face it, not every startup succeeds. Not by a long shot. But no startup founder (myself included) ever wants to think about joining the dead-pool. Indeed, there is very little discussion out there on proper steps to close up shop.

However, if it is time to send out that dreaded mass email to your users, call Rackspace and cancel your server plan, and turn out the lights, remember these five tips to ensure a smooth transition to your next, more successful venture.

Read ALL of your documents

If you think it might be time to shut down your company (or the lack of money tells you it is), start by locating all of your corporate documents. Depending on your corporate structure you may have such documents as an operating agreement, articles of incorporation, bylaws, shareholder agreements, partnership agreements, etc. You also likely have employment agreements.

Read them.

Most, if not all, of these documents contain provisions that expressly address what happens in the event of dissolution. Knowing what your documents say is the first step in properly shutting down. Make sure you also read your terms of use and privacy policy. These are just as important. They are agreements with your users. Make sure you know what these documents say about your users’ information and data, and takes steps to ensure compliance.

Shut down your business the right way

Understand your liabilities. Do you owe money to creditors? If so, can you work out deals to settle the debts (get releases in writing). Do you owe money or refunds to your users? Understand your assets (likely little) and whether you can sell them. Then decide what option (such as Chapter 7 or liquidation) is best. This is an oversimplification and there are many more considerations here, so consult an attorney.

Also, don’t forget to properly terminate your business in the eyes of both everyone you have done business with (customers, suppliers, vendors, and so on) and the state where you formed. Regarding the former, provide notice and the date you are ceasing operations. Regarding the latter, make sure you file the necessary forms. Your state may have statutory requirements that must be followed, so check with your state. Overall, avoid any lingering confusion regarding whether you are an active business.

Pass on your IP correctly

Start by figuring out who owns the IP related to your company (patents, trademarks, and copyrights). Don’t forget pending applications as well. As discussed above, that IP may need to be sold as part of a bankruptcy proceeding. If not, make sure it is correctly assigned to the individual taking control of the IP. In writing, of course.

Talk to a good accountant

This is important on two levels. First, you will want to understand the tax obligations of your company. You may have corporate taxes, payroll taxes, wages due, outstanding debts. Remember, tax obligations may survive bankruptcy. Further, you may need to provide proof to the state that the business has paid all the taxes owed before you are allowed to dissolve a company. Second, you will want to understand your own tax implications. Don’t be surprised come tax time. This is one area that you will want professional advice. Sorry Google.

Preserve your records

Don’t just toss out your documents and delete your files. Retain your documents and electronic files. Put them in a safe place. If a legal issue comes up, and you failed to save the related documents, you may quickly find yourself in hot water.

Hopefully your wind down process will be smooth. If you are like most entrepreneurs, you are probably already well on your way to your next venture.

Ryan Bowers is the founder of RFPattorney.com, which provides cloud RFPs for legal departments and a cloud legal marketing platform for lawyers. He is also the General Counsel and VP Operations for a large construction company and previously practiced construction, antitrust and technology law. He blogs at blog.rfpattorney.com.

Decreasing graph image via stefanolunardi // Shutterstock


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