Like most entrepreneurs, you’re betting on a home run. The reality is that a strikeout is always a possibility. You should plan for it. An orderly shutdown of your startup, if it becomes necessary, will help protect you and your investors from potential liabilities. These founders and startup lawyers will help you navigate the ins and outs.

Two years after closing his video game business, Chris Oltyan got a call from a sheriff in Virginia, where his startup was based. “I’m calling about a notice for your arrest on fines in excess of $20,000,” he remembers him saying. The sheriff explained that Oltyan’s company had been accruing fines with the state employment commission. Although Oltyan had shut down the website and filed dissolution documents with the secretary of state, he had failed to inform the employment commission, and as the company’s primary officer, he was liable for unpaid bills.

A law student had helped Oltyan with incorporation and investor filings in the early days. By the time of the closure, the student had become a lawyer, and Oltyan couldn’t afford him. “He had said, ‘I can’t do this pro bono and you really should get legal counsel,’” Oltyan says. “So I said, ‘I got this, hold my beer.’”

Oltyan managed to clear things up with the state, file the relevant documents after the fact and escape jail time. But his story serves as a warning to founders who walk away rather than carefully shut down their startup without understanding the ramifications of a haphazard end to their business — if the business ends at all.

Of course, not every founder of a sloppily shuttered startup will find themselves in the sights of law enforcement, like Oltyan did, but they could face a series of serious issues ranging from liability for unpaid debts to claims from former employees and vendors.

“If a business doesn’t really dissolve and founders don’t close it down, it’s still open and there’s still liability out there,” says Andrew Comer, an attorney at Fortis Law Partners in Denver, Colorado.

Careless startup shutdowns have real consequences

No founder likes to contemplate failure. But the truth is that nearly 4 out of 5 of seed-stage startups don’t make it, be it because of lack of market demand for their product, failure to execute, insufficient funds, external factors like the COVID-19 crisis, or one of the many common challenges entrepreneurs face.

Whatever the trigger, unwinding a business is a painful process for any entrepreneur, not the least, because they’ll be among the last to get anything left in their startup. And it demands just as much detail and formality as starting a company, if not more. …