The Legal Implications of Closing Your California Business

December 28, 2012

It’s a dreaded reality that some business owners may have to face. In fact, in some areas of the California, it’s a reality that a firm majority of new businesses have to face. We’re talking about the prospect of closing. And whether you’re making the decision to close the business because it isn’t bringing in the profit you had hoped, or whether you’re planning to retire with no one to take up the reigns, closure of the business has several serious legal implications.

First and foremost, you will need to break the news to your employees. Depending on the structure of the business, those employees may be entitled to severance pay, temporary health insurance benefits, and notice of the date of their final paycheck. Regardless of the time of year in which you close, your employees will need to be provided with W-2 forms for whatever portion of the fiscal year they worked. The bad news is best delivered sooner than later so that employees can begin the job search process as soon as possible.

Another legal implication has to do with existing contracts. If, for example, a failing restaurant has an existing contract with a food supplier for fresh vegetables each week, the company operating the restaurant still has the obligation to adhere to the terms of the contract for the duration of the contract period. Contracts are legally binding promises that usually do not expire just because one of the parties becomes insolvent. An experienced California small business attorney can help renegotiate contract terms in this situation so that you’re not paying for deliveries of fresh vegetables well beyond your closing date.

In the case of a retail store, existing inventory may become a huge issue. Retail stores that close typically announce an inventory liquidation sale to raise money to pay off their creditors. The idea is to quickly turn items that would be useless to creditors into cash and to apply the proceeds of the sale toward the outstanding debts. Liquidation, in some cases, may prevent the business owner from having to declare bankruptcy.

Finally, you may want to consult an attorney to help officially dissolve the business entity. The charter documents that you filed with the State declaring your intent to operate under a certain legal entity structure may also have specific procedures to follow in winding up the business. Similarly, the State may have its own procedures for declaring the termination of the entity’s existence. Proper dissolution of the business is a step that should not be taken lightly, as it can have a tremendous impact on your personal legal exposure on any existing or forthcoming legal claims.

Your business closure is sure to be a stressful and emotionally trying process. The best way to cope is to let a legal professional handle some of the more complicated tasks and ensure that your business and legal obligations have been met in accordance with California law. That way, you can focus on building your new financial future.

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