Closing a Business: Complete Guide
Whether you are closing your business because you are retiring, or the business is failing, it can be a challenging and emotional experience.
If you are closing your business voluntarily you can allow significant time to plan your closure. This helps you to close efficiently, meet your legal obligations, save money and, ideally, take away maximum profits.
You may consider closing your business if it is failing and you are finding it hard to sell. In this case, selling some or all of your business assets, paying off your debts and keeping whatever remains might be your best option.
If your business cannot manage its debts you may be forced to close down by becoming bankrupt (sole trader) or insolvent (company). This is a last resort and you should seek expert advice to see if you can avoid it, as there are serious consequences.
The following guide explains how to close your business and the legal requirements involved.
Voluntarily closing a business
There are 2 situations in which you would voluntarily close your business:
- You no longer want to run the business, you don’t want to sell it and you have no-one to succeed you.
- Your business may be failing and you are finding it hard to sell. In this case selling some or all of your business assets, paying off your debts and keeping whatever money remains might be your best option. If you can do this before you become insolvent or bankrupt, it can help you get out of business without any long-lasting impacts.
Once you have decided to close down, it is important to create an exit strategy. Your accountant, solicitor or business adviser will be able to help you create a closing down plan.
The time it takes to close down is directly related to your business structure and the specific circumstances and reasons for closing your business. Larger companies with complex operations may take several years, while a sole trader operating from home may only take a couple of weeks to close down.
Emotional costs of closing a business
Closing down can be a confronting experience for you, your family and your employees. Some small business owners may also feel they are letting their customers and community down, as can businesses that have to stop ordering from other small businesses (suppliers, etc.).
Try to stay positive during this time. Counselling services can help you deal with emotions that come from losing your business and figuring out what your next steps should be.
During this time, be sure to manage your stress and ensure your finances are in order. It is important to talk to your lawyer and accountant to work out ways to effectively manage this.
Legal requirements for closing a business
Depending on your legal structure, all or some of the following points might apply to you when you voluntarily close your business.
Cancelling your business name
You must cancel your business name within 1 year of closing down.
Obligations to employees
You are required to notify staff about terminating their employment or else provide them with payment in lieu of notice. Permanent employees will usually be owed entitlements when your business closes and their employment ends. These entitlements could include accrued annual or long-service leave.
You must finalise all tax issues for your business, even if it is no longer trading. This includes your obligations for fringe benefits tax, pay as you go, superannuation and employment termination payments. Learn more about yourobligations to employees.
There are certain taxation deadlines and obligations you must meet check www.kra.go.ke.
If your industry or business requires you to have professional indemnity insurance, you will still need to keep a policy (called run-off cover) after you close your business. Because your liability does not cease when the business closes, run-off cover is designed to protect you from future litigation.
Deregistering or winding up a solvent company
There are 2 ways to close your company if it is not in financial difficulty or insolvent:
- You can apply to voluntarily deregister your company. Your company must first meet certain legal requirements.
- Members of the company may decide to voluntarily wind up the company.
Consider talking to a business adviser to determine which option is appropriate for your company.
Dissolving a partnership
Partnership agreements are legally binding contracts that set out the rules for a business operating under this legal structure. Partnership agreements usually specify conditions under which the partnership will be terminated and how assets will be distributed among partners. Be sure to get legal advice before winding up a partnership.
Creating a closing down plan
A closing down plan will give you a timeline for completing activities and a checklist of your legal requirements.
Your closing down plan should cover the following steps:
Talk to your business adviser
- Talk to your accountant, solicitor and business adviser about legal requirements for closing your business.
Prepare to close down
- Check the expiry dates of current leases (e.g. premises, equipment, car) and what your obligations are if you need to terminate your lease before the end of the lease period. Your solicitor can help with this process as leases can be quite complex and may have strict conditions and penalties if you need to break them early.
- Prepare a list of your current business assets and stock and get a professional valuation.
- Inform employees, customers, suppliers, insurers, bankers, consultants, creditors and contractors when you will be closing down. You should also tell them who to contact if they have any questions.
- Collect any outstanding payments from customers.
- Notify the Kenya Revenue Authority that you are closing your business.
Close down operations
- Arrange to shut off water, gas, electricity, phone, internet and any other services before you close.
- Stop operations (i.e. cease all production, sales and employment).
- Sell or transfer your business assets. You could hold a closing down sale or advertise online to sell the stock, equipment, furniture and fixtures and fittings you no longer need.
- Cancel your business registration, insurance policies and any other registrations.
- Settle your business debts and arrange final payments to employees (employment termination payments).
- Prepare final financial statements and lodge tax returns.
- Close your business’s bank accounts.
Store your records
- Securely store your business records. You must keep records for a minimum of 5 years after your business closes.
- If you are not legally required to retain personal records, you will need to destroy them. You should shred, pulp or destroy the paper on which the personal information is recorded, place the files in a security garbage bin and securely delete any electronic record or file from computer systems to ensure it cannot be retrieved.
Insolvency and bankruptcy
Insolvency occurs when your business cannot pay its debts, which can result in your business closing down. Different insolvency procedures apply to individuals and companies.
It is important to recognise financial difficulty early so you can look at ways to avoid insolvency. You should always seek financial and legal advice when you are having trouble managing your debts.
- Learn more about surviving an economic downturn.
- Find out how to manage your cash flow.
Personal insolvency procedures apply to sole traders and individuals in a partnership.
If you are unable to pay your debts, there are 3 formal options for dealing with unmanageable debt:
- debt agreements
- personal insolvency agreement
- voluntary bankruptcy.
Declaring bankruptcy is a serious decision. Bankruptcy may last up to 3 years or more and will affect your ability to:
- borrow money
- travel overseas
- perform certain jobs.
Learn more about bankruptcy.
An insolvent company is one that is unable to pay its debts. In some situations, insolvent companies may go into liquidation. Liquidation is the orderly winding up of company business. It involves stopping all operations and sales, selling company assets to pay creditors and distributing any surplus funds among shareholders.
There are 3 types of liquidation:
- court liquidation
- creditors’ voluntary liquidation
- members’ voluntary liquidation.