“Shut it down down down / You would shut it down down down” — Drake, ‘Shut It Down’
(Disclaimer: I am neither a lawyer nor an accountant so nothing here should be construed as professional advice, but rather as an educational tool for other entrepreneurs. I highly recommend consulting with an attorney and accountant to ensure you wind things down properly to avoid any future legal/tax issues.)
After a co-founding and spending more than a year working on a new venture (creating custom casts and braces to treat bone and muscle injuries using 3D printing and scanning), we decided to unwind things at the end of last year. I won’t go into details about why we decided to close up shop but rather focus on how we did it (there are already tons of “post-mortem” posts written by others).
As a long-time entrepreneur, I understand the ins and outs of starting and operating a company, but shutting one down was new to me and I was surprised at the lack of clear information that was available. After going through the process, I thought I’d share what I’ve learned and hopefully help others who end up in a similar situation.
Before I continue, please note that our startup had a particular set of circumstances that, in retrospect, made the whole process a bit more straightforward:
- We were bootstrapped — since we had yet to raise any money, the co-founders had covered all expenses (this is important, because if you had investors the decision to shut down can be more complicated)
- We were pre-revenue — since we were not yet out in the market we had no revenues to speak of (only expenses)
- We were pre-employee — other than the 2 co-founders (who took no salary) there were no other employees
- We were a Delaware C corp — it is generally more straightforward and less expensive to shut down a Delaware company than those formed in other states
Remove Emotions and Explore Options
Egos are hurt, emotions are running high, relationships among founders are most likely damaged, but at the end of the day, this is a business decision and cooler heads need to prevail. Assuming you have exhausted other options to “save” the business (buy out other founders, sell the business, etc.), and everyone has agreed it’s best to wind things down, it’s best to “rip off the Band-Aid” and resolve things quickly (however painful) so everyone can move on:
Notify Key Stakeholders
The first thing we did was reach out to our small group of advisors and relay the news. While it took most of them by surprise, they were all very supportive and appreciative of our honesty and directness. And they deserved to be the first to know.
Vote To Dissolve Corporation
As a Delaware C corp, a vote to dissolve to corporation is taken by the board of directors (most likely the founders). A majority of outstanding shareholders must also approve the dissolution (for most pre-seed startups the founders will hold most of the shares).
Calculate Founders’ Financial Contributions In Relation To Ownership
Since we were bootstrapping things, from the very beginning we maintained a detailed spreadsheet to track money each of us had contributed for items used by the company — desk rentals at our co-working space, equipment, software, supplies, travel, etc. The final co-founder financial contributions were not exactly 50/50, so we agreed that this would be settled up using proceeds from the sale of any assets (computers, 3D printers, etc.).
Sell Assets And Settle Up Among Founders
This can get a bit tricky/messy if everything was paid for using personal funds/credit cards since nothing is technically “company property” and each founder could stake a claim to whatever they purchased unless it was explicitly assigned to the business.
In our case the company had only limited assets/IP at this stage (some code and a provisional patent application). There were no takers for the provisional application or code, but we agreed to sell off any tangible assets (mainly equipment) and use the proceeds “settle up” among founders. The remaining funds would be used to pay off any debts and cover dissolution-related expenses.
We used eBay and Craigslist to sell the items (don’t forget, eBay and PayPal will take a cut from any sales, plus you need to factor in shipping charges).
These funds would then be used to…
Pay Off (And Negotiate) Debts
Fortunately, our debts were minimal — we owed some deferred legal fees to a firm who handled our incorporation and shareholder agreements, and an IP lawyer who filed our provisional application (they originally agreed to be paid once we raised our seed round). We let them know about our decision to wind things down and asked if they would accept lesser amounts as payment. The law firm did us a solid and waived all of their fees sans state filing fees (since they are interested in cultivating a relationship and working together again in the future!). We were also able to settle with the IP lawyer for what everyone considered a fair amount. Once we sold off the assets, they were paid.
File Annual Reports And Pay Outstanding Franchise Taxes
Even if your startup was pre-revenue, you are responsible for paying annual Delaware franchise taxes and submitting annual reports. Even though we stopped operating at the end of last year, a mistake we made was submitting the final dissolution paperwork after the new year, which meant we were also responsible for paying 2016 fees (and if you missed the March 1st franchise tax filing deadline, you will incur additional penalties).
Every Delaware LLC is also required to have a Registered Agent (they act as a liaison between your company and the state), and the agent can take care of the franchise tax returns and dissolution for a small fee.
Submit Certificate of Dissolution
In Delaware, all debts need to first be paid off before a company can be dissolved. There is a form that needs to be filed and Delaware charges a $200 fee to dissolve an entity.
File Final State and Federal Tax Returns
A corporate dissolution notice Form 966 must be submitted to the IRS within 30 days after the dissolution resolution date. Federal and state returns for the previous and current year must be filed (include a copy of the certificate of dissolution with the state return). Make sure you check off the box indicating they are “final” returns (you’ll most likely have to wait until the following year’s filing season to submit your final returns). The IRS does provides thorough checklist of shutdown items, so if you had employees, ran payroll, or received income you may be required to file additional forms/payments.
Discontinue Registered Agent Service
Make sure to formally notify your Registered Agent so you are no longer charged for their services (typically billed annually).
Deactivate Employer Identification Number (EIN)
The government will not cancel an EIN, but rather it will deactivate it so no one else can use it to obtain credit, loans, etc. You’ll want to make sure this is taken care of. Also, if you have opened a Dun & Bradstreet number (D-U-N-S) you should notify them as well.
Reflect, Decompress, Move On!
After bootstrapping your venture (with no pay) for some time, the last thing you want to do shell out more money to wind things down. Trust me, it sucks. But once everything is finalized you’ll feel a true sense of closure and be ready to move on without the risk of future tax or legal surprises while you are off working on your next venture!
As for me, I’m working on a few personal side projects, conducting a variety of self-tracking and biohacking experiments on myself, and exploring some new ideas I had put aside while working on my last venture. Watch this space! Feel free to connect on LinkedIn or Twitter, and perhaps there may be opportunities to collaborate in the future!
