I have been in a retail business with a partner for several years (we have a limited liability company). The business has been clobbered by the economy and we have decided to shut it down. There is no bank debt, but we do have a lease and some credit-card balances that we have both personally guaranteed. We also owe quite a bit to suppliers and one of us has loaned a substantial amount of money to the business. There’s also a good chance we have some debt we don’t know about, as we haven’t exactly kept perfect books and records over the years. What’s the best way for us to get out of this business and get on with our lives?”
You cannot imagine how many e-mail messages like this one I’m getting these days. Let’s tackle the tough one first — the lease. You may be able to negotiate an early termination, especially if the premises are in a desirable location and there’s a good chance the landlord will find a new tenant fairly quickly.
Give the landlord plenty of advance notice — try to make your rent payments as long as you can to give the landlord enough time to advertise the premises for rent, contact brokers and sign up a new tenant. Offer to let the landlord keep your security deposit in exchange for releasing you from your personal guaranties, with the understanding your LLC will still be on the hook for future rent payments. Find someone who can sublease your premises for the remainder of your lease term at a rental slightly less than what you are currently paying — that way, you will be liable only for the difference between what the sublessee pays and what you were required to pay.
Next, calculate the amount of other debt the two of you have personally guaranteed and figure out if selling all of your equipment, inventory and other LLC assets will pay these in full. Be sure to include any sales, use and other taxes you may owe for the current year, as in many states, you are personally liable for these even if you have an LLC. If liquidating these assets won’t pay all the debts, work out an agreement as to how the two of you will split the shortfall.
Assuming you can pay all personally guaranteed debt by liquidating the LLC assets, with some money left over, prioritize your other debts and work out a plan as to who will be paid and in what order. Accountants, lawyers and other professionals whose help you may need to close your doors and deal with unhappy creditors should be first in line for payment. Since you probably don’t have good enough records to know if you personally guaranteed these or not, it’s best to set up a reserve account in a local bank and deposit in that account your best guess as to what the amount of these liabilities would be. The account would exist for one year after your LLC dissolves and if any liabilities crop up that you didn’t know about, you would pay them out of the account.
If there’s any money left in the account at the end of the year, you would close the account and pay yourselves back the balance.
As for the loans one of you has made to the LLC, that partner will probably have to write them off as bad debts if he legally can. If there’s any money left over after paying all the other debts, it will probably be paid to the lending partner so he can recoup at least some of these losses.
Once you have worked out how all the debt will be paid, it’s time to dissolve and liquidate the LLC. Your attorney will file a Certificate of Dissolution with your state Secretary of State’s office; your accountant will file “final” tax returns with all tax authorities; and your LLC will cease taking on new business. You will liquidate all the LLC assets, pay all debts and distribute any money left over to yourselves as the LLC owners. Your LLC will continue to exist until all “winding up” activities have been completed so you can continue to use the LLC name as long as you don’t take on any new business.
Review your LLC Operating Agreement (similar to a partnership agreement) to determine if there are any noncompete or other provisions that would survive the liquidation of the LLC. If there are, give some thought to renegotiating those so you are free to pursue whatever future dream awaits.