Steps to shut down a startup

Even the best entrepreneurs build companies that don’t work out and move on to more success later. If you’re in the process of shutting down, I want to explain to you some of the steps to shut down your company appropriately. Remember that there can be liability for founders when a company is being shuttered, and you want to make sure everything is closed out properly, so you don’t face repercussions later. For example, I’ve received emails from entrepreneurs whose personal bank accounts are still being debited by California three years after their company closed, because the state thinks they should still be paying the state franchise tax. Here are things you need to know when shutting down:

How to shut down a startup

  • File final tax returns
  • File a Delaware certificate of dissolution
  • File a final Delaware franchise tax report
  • File dissolutions for states where you operate
  • Complete an IRS dissolution
  • Prepare your liquidation distribution
  • Understand your employee obligations
  • Rank your creditors
  • File your final tax returns. Make sure your accountant or CPA is filing your final federal, state, and municipal (if applicable) income tax returns. Remember to do this in every state in which your company operates. The IRS and state governments have your Social Security number on file along with an Employee Identification Number (EIN) and other tax identification numbers. Filing your final tax returns and properly dissolving the company will avoid headaches. There can be expenses associated with this, so you need to make sure you reserve funds to cover these costs. Sometimes companies may run out of money and can’t pay for the final returns. In that case, the founders may have to pay that expense personally.

  • File a Delaware certificate of dissolution. This certificate needs to be completed and mailed in. While your lawyer will probably do this, it’s not hard and you can do it yourself. You can review samples on the state of Delaware’s website.

  • File your final Delaware franchise tax report. Delaware has a franchise tax website that allows you to complete the final tax report. You will need your up-to-date financials, so you have an accurate asset value. In addition, you will need your capitalization table, so you have a current listing of all the outstanding securities your company has issued and who owns them. If you complete this yourself, make sure you click the “final filing” button and then the “recalculate” button when you’re done to get an accurate total of what you owe.

  • File state dissolutions. Just like filing your final return, you need to file a state dissolution form for every state in which the company is operating. These have different names in different states – for example, the state of California has a certificate of surrender. Remember, if you don’t file these forms, states may still expect tax returns from you every year.

  • Complete an IRS dissolution application. This is IRS form 966 Corporate Dissolution or Liquidation, which is available from the IRS website. Typically, your accountant will complete this form, but you can complete it yourself if necessary.

  • Prepare the liquidation distribution. The liquidation distribution is the capital returned to investors when a corporation is shut down. This is reported on IRS Form 1099-DIV. You will redistribute any cash on hand to your investors to make them as whole as possible. This is an important step because you want to stay on good terms with your investors. They will understand when a company doesn’t work out, and if you distribute the remaining cash appropriately, you’ll maintain your relationships and hopefully be able to work with them again.

  • Understand what you owe your employees. Both legally and ethically, you have an obligation to your employees. Some states have very strict rules around severance for employees; make sure you follow them. It’s also important to think about the hardship that you may put your employees into as they lose their employment. Are you able to help them find other positions? Will you provide references? Taking care of your people to the best of the company’s ability is always a smart and thoughtful decision.

  • Rank your other financial obligations. If you owe landlords, software providers, suppliers, or other creditors, you may need to file for bankruptcy. Working with an attorney will help you think through this list. Remember, your reputation will follow you after you wind the company down.

Shutting down a startup isn’t a fun topic to discuss, but it is a part of being an entrepreneur. By taking the right steps you’ll better position yourself for your next startup. At Kruze Consulting, we have an interesting vantage point in that we work with lots of entrepreneurs, and many times the next effort is the one that works well and becomes successful. If you have questions about this process, please contact us.