When to Shut Down Your Entity and Start Over
Is your business not turning out the way you planned? You may have had to go back to work for someone else to bring in money for you and your family. This happens all the time. Is business slow and you are contemplating that move as well? You set up a separate legal entity for your business with one of the primary goals being to protect the revenue that would come from your business. Do you shut down and dissolve that entity or keep it active for another business opportunity?
Let’s discuss your options:
Situation #1: Your first business did not work out and you plan to look for another opportunity in the upcoming months.
Solution: Do not shut down your entity. You can use the same entity for a new business. Corporations typically have the wording “engage in any legal business activity” which means it can be direct sales one day, and internet marketing the next. You have flexibility. The LLC articles do not even discuss the business purpose. It is internal to your operating agreement.
Exception: The entity had a partner and now you are on your own with the new business. You never want to start a new business in an entity with an existing partner; if you make a lot in profits, it is possible that your “old partner” may come out of the woodwork to “collect” some money. Meaning, they may claim they are still “officially” your partner and they own 20, 40, 50…percent of your company and they want to be paid. Can you say, “lawsuit”! It happens all the time. In this case, spend the money to form a new entity.
Another exception would be if the past business has a lot of liability and the next business is going to be a big cash cow. I would recommend forming a new entity for that case.
Situation #2: Your first business did not work out and you are not planning to go into business again for 1-2 years.
Solution: Do not shut down your entity. If you have any plans to start a new business in a couple of years it will be worthwhile to keep your entity in good standing for credit purposes and marketing. Meaning, two years from now your entity will be at least two years old if not older. That age has value to you. It is much better than shutting down the entity and starting over.
Situation #3: Your first business didn’t work out and you are starting a new business.
Solution: The new business may require a different type of entity. If in California and you were involved in a licensed activity like a mortgage broker you had to have a corporation (not an LLC) because any licensed person in California can NOT be an LLC. Now, you may be in a high cash business with residual income and you realize that an LLC taxed as an S corporation may be best. Instead of converting the corporation to an LLC (which can be done through the Secretary of State’s website) form a new entity. The reason is that there are extensive statutory requirements required when you convert an entity. Of course, most only want to know which state form to file and how much and never really bother to read the statutes. Our attorney quoted their fee for a conversion at $2,000 (even though the state fee is only $350). There is a lot of legal work to be done with a conversion.
If you do shut down your entity you have a choice to either formally dissolve the entity or let it lapse. Every state has different rules on this and be sure to be clear on your states rules. You may want to check with your local professionals. In Nevada, if you dissolve an entity, you personally become the personal trustee for 90 days in case there are any legal issues against the entity. If you just let it go, in state records it will show up as in “default” or “revoked” status. Make sure you never operate an entity in revoked status because you may be personally liable if the entity is sued. Revoked basically means you have no entity or protection any longer.
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