Closing a business

As the business owner, you'll have to:

• deal with your feelings about leaving everything you've built up, as well as your staff's concerns and uncertainties
• juggle the workload and pressures of still operating the business, while preparing it for closure.

To do this, try to give yourself the benefit of a strong support network:

• a business adviser (a lawyer, accountant or financial counsellor)
• your friends and family
• mental health support services (see below).

Also try to:

• get a clear understanding of the reasons you're closing your business
• have a well-defined idea of what you'll do after you've closed the business.

As an employer, you need to monitor and provide support to your employees during this stressful time. Be aware of any possible health and wellbeing issues they might experience because of:

• job insecurity
• transitioning through the sale of the business
• change in owners.

You can:

• provide them with contact details for counselling services (see below)
• read about how to manage people through change
• learn more about communicating effectively for business.

You must cancel your business name with the Australian Securities and Investments Commission (ASIC) within 28 days of closing down.

Notify your staff

You must give your staff notice if you're ending their employment. If you notify them while your business is still trading, you must continue to look after their health and safety in the workplace. This includes their mental wellbeing. When you let them know that their employment will be terminated, also give them information about, and contact details, for counselling support services.

Check staff entitlements

Permanent employees will usually be owed entitlements. Bookkeeping software will:

• show the amount owing to each employee
• calculate entitlements owed until the employment end date.

These entitlements could include accrued annual leave or long-service leave. Check employment contracts to ensure you're paying the required notice stated in their legal agreements.

Finalise employee tax-related matters

You must finalise all tax issues for your business, even if it's no longer trading. This includes your obligations regarding payment of:

• fringe benefits tax
• pay-as-you-go (PAYG)
• superannuation
• employment termination.

Learn more about these obligations to employees.

Cancel workers' compensation accident insurance

You'll also need to cancel your workers' compensation policy by following instructions on page 4 of the WorkCover understanding your workers' compensation accident insurance policy (PDF, 828KB).

There are tax deadlines and obligations you must meet. For example:

• if your business is registered for GST you have to apply to cancel GST registration within 21 days of ceasing business
• if you have an Australian Business Number (ABN), you'll need to notify the ATO within 28 days of ceasing business.

Before you cancel your ABN

Before you cancel your ABN, you must:

• lodge all activity statements
• meet your PAYG withholding obligations
• ensure you meet your tax liability.

If your industry or business requires you to have professional indemnity insurance, you'll 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.

Working your way through insolvency or bankruptcy can be one of the most stressful experiences of your life. If you try to deal with it yourself, you'll need to communicate with every creditor individually to try to negotiate regular payment amounts.

Insolvency or bankruptcy advisers can:

• support you through the process
• help you understand your options
• negotiate with your creditors on your behalf.

They hold specific licences and qualifications in this specialised field. Their fees can be high and they usually require a lump sum payment from you upfront.

It's important to recognise financial difficulty early so you can look at ways to avoid insolvency. You should also be aware of creditors putting enquiries or defaults against your credit file.

You should always seek financial and legal advice when you are having trouble managing your debts. It's difficult to pay for this advice when you're in financial difficulty. However, it's essential for you to know what your options are, and what the consequences are for each option.

Temporary debt protection

While you explore your options, you can apply for temporary debt protection (TDP) from the Australian Financial Security Authority (AFSA). If approved, this will provide you with 21 days temporary protection during which time creditors (including sheriffs) cannot take any enforcement action for the debts you owe.

During this 21-day period, you should seek advice from a lawyer, accountant, insolvency adviser, or start to negotiate payment plans with your creditors.

You cannot reapply for a TDP for a further 12 months, so use the 21-day period wisely to explore the most suitable options for your specific financial situation.

Personal insolvency procedures apply to:

• sole traders
• individuals in a partnership.

Before starting a personal insolvency process, it's important to understand the:

• impact of the consequences
• how long the impact will be.

Consequences can include:

• a record on your credit file
• not being able to obtain finance
• having rental applications rejected
• restrictions on future employment
• inability to be a director of a business.

If you're unable to pay your debts, the Bankruptcy Act 1966 (Cwlth) provides 3 formal options for dealing with unmanageable debt.

Debt agreements

Debt agreements, also known as a Part IX agreement, allows you, or the appointed administrator, to negotiate with your creditors to pay a percentage of the combined debts over a period of time to your administrator, rather than trying to continue making payments to each creditor. There are certain thresholds for the value of debt, property and income that you must fall under to be eligible for a Part IX debt agreement.

Personal insolvency agreements

Also known as a Part X agreement, a personal insolvency agreement is a way to come to an agreement with your creditors to settle the debts and avoid bankruptcy. You must have already met the requirements of being assessed as insolvent to be eligible for a Part X agreement. No thresholds for the value of debts, income or property value apply.

Voluntary bankruptcy

Declaring bankruptcy is a serious decision. Bankruptcy will affect your ability to:

• borrow money
• travel overseas
• secure certain employment positions
• become a director of a business or board.

Learn more about bankruptcy.

An 'insolvent company' is unable to pay its debts or cover the cost of its overheads. In some situations, insolvent companies may go into liquidation.

Liquidation is when an independent registered liquidator is appointed to take control over the company and wind up the company business in an orderly way. It involves:

• stopping all operations and sales
• selling company assets to pay creditors and staff entitlements
• distributing any surplus funds among shareholders.

There are 3 types of liquidation:

• court liquidation
• creditors' voluntary liquidation
• members' voluntary liquidation.

Learn more about company insolvency procedures.

Use the comparison tool to help you understand and explore which option would best suit your financial situation based on the value of debt, income and property.