Hold 'em or Fold 'em: When to pull the plug on a business

"You've got to know when to hold ‘em. Know when to fold ‘em." Wise words from Kenny Rogers—and most apt for the owner of a struggling business.

But this advice is easier said than done. It's tough deciding to shut down a tanking business—mainly because it's hard to gauge when a struggling business is a lost cause. Here are the major signs:

Stage 1. A business is weak when it can't survive on its own revenues. This is often true of start-ups that are launched on a shoe-string budget. The only hope for such an enterprise is that its revenues soon match expenses.

Stage 2. A business is sick when its owner(s) are paying expenses (payroll, costs of goods, suppliers, utilities, etc.) with personal loan funds—as opposed to a business loan taken as part of the original thought-out business plan.

Stage 3. The business is brain dead as soon as business owner(s) start paying expenses with trust funds that should be set aside to pay payroll or sales taxes. Those taxes will have to be paid by the owners and cannot be discharged in bankruptcy.

A Stage 2 business owner should probably cease operations unless the business can be sold or capital can be infused into the enterprise. But beware of getting investors into a sick business; such efforts may run afoul of securities laws. This is the area securities violations happen and where Ponzi schemes are born.

A Stage 3 business owner should immediately consult with an experienced bankruptcy lawyer for information on how to shut down the business and minimize exposure to the owner(s).

Shutting down the business usually involves:

(a) creating a strategy for ceasing operations,

(b) dealing with employee layoffs and terminations,

(c) preparing for pension and retirement roll-overs,

(d) resolving health care insurance coverage for workers and principals,

(e) addressing worker's compensation and unemployment insurance issues

(f) closing down utilities,

(g) wrapping-up book keeping,

(h) notifying State, county, and city licensing agencies,

(i) terminating leases,

(j) filing final tax returns,

(k) monitoring and eventually closing bank accounts,

(l) assessing errors and omissions issues

(m) filing dissolution documents with the State

(n) holding-off on liquidating assets and paying unsecured creditors until you've counseled with a bankruptcy lawyer to avoid creating problems with preferential payments in bankruptcy or inadvertent fraudulent conveyances

This list is exhausting, but sadly it is not exhaustive. The more complicated your business was, the more effort needs to be made to wind-up business in a way that will create the least amount of trouble for your partners, employees, creditors, and you.

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