Closing down a business can be deeply painful. It represents the proverbial death of your dreams, that your blood sweat and tears were all in vain and ultimately the break-up of the business family. Furthermore, closing the enterprise down also comes with a lot of legal requirements.
Closing down has been the reality for many entrepreneurs. Research shows that up to 80% of all start-ups fail within the first two years, and of the remaining 20%, the majority will fail in the following three years.
What many entrepreneurs do not think about, however, are the legal responsibilities that come with having to close a business down. From tax and contracts to handling employees and shareholders, it is essential to ensure all the legal requirements are handled adequately to avoid potential problems later on.
Admitted attorney and associate at legal firm M Prem Inc, Lesya Pansegrouw, specialises in commercial and civil litigation, contract drafting and general commercial and corporate law, and dealing with businesses that close down is something she is very familiar with.
In the first of two articles looking at the legal requirements for closing down a business, Pansegrouw breaks down the most important legal aspects of a business that is closing down without undergoing the liquidation process.
1. Deregister The Business
A business can close down in one of two ways – deregistration or liquidation.
What is Deregistration?
There are two ways a business can be deregistered, says Pansegrouw. A company and close corporation may be deregistered for non-compliance with requirements or through voluntary deregistration.
Pansegrouw says the business itself may request deregistration but, it has to show two things. Firstly, that it has ceased to carry on business and secondly that it either has no assets or that its assets are inadequate for the business to be liquidated.
According to the South African Revenue Services (SARS), this effectively means that the company or close corporation is not doing any business nor has any assets or liabilities.
What Do I Need to Do?
If you wish to deregister your business voluntarily, the first thing you need to do is write a letter to the Companies and Intellectual Property Commission (CIPC) confirming that the business has stopped or is dormant and has no assets.
This letter, Pansegrouw says, must be signed by each active member of the business.
Deregistration should take about 3 months after which the final deregistration notice will be posted.
2. Sort Out Your Contractual Obligations
Contracts could very well be most businesses’ trickiest legal minefield, and just as it is important to get your contracts right while the business is operating, you should not make the mistake of neglecting them when the company closes down. Unfulfilled contractual agreements can easily come back to haunt you.
This makes it very important to understand and handle them with care as you close the business down.
What Happens to Your Contractual Obligations
Pansegrouw says the effect of deregistration is that the business is dissolved, meaning that all its property passes automatically into the ownership of the state as bona vacantia (ownerless goods), contracts are terminated, and any debt due is rendered unenforceable against the business.
Something to Keep in Mind
Voluntary deregistration is only possible if the business has no assets or liabilities, says Pansegrouw and will therefore, have no contractual liabilities and no outstanding debts.
3. Your Employees
At the heart of any business, the employees are usually the worst affected by a business shutting down. Therefore, it’s important for the business owner to handle employee-related issues with care.
This would include aspects such as letting them know well in advance of the impending closing down of the business and that employee benefits such as retirement annuities and medical aids are dealt with adequately.
Pansegrouw says deregistration essentially means that relationships such as employment relationships cease to exist, nor will they have liabilities towards any employees.
5. Take Care of Director And Shareholder Liability
Pansegrouw says the deregistration of the company does not affect the liability of any former director or shareholder of the deregistered company in respect of any act or omission that took place before deregistration.
These liabilities will continue and may be enforced as though the company had not been deregistered.
6. Taxes
Once a business receives confirmation from the CIPC that it has been deregistered, the registered representative should visit their nearest SARS branch and make sure the business is deregistered for all the various types of tax.
In the next article on the legal considerations you need to know when you are closing down your business, Pansegrouw will look at the option of liquidating a business.
