Closure (business)

For other uses, see Closure (disambiguation).

Closure is the term used to refer to the actions necessary when it is no longer necessary or possible for a business or other organization to continue to operate. Closure may be the result of a bankruptcy, where the organization lacks sufficient funds to continue operations, as a result of the proprietor of the business dying, as a result of a business being purchased by another organization (or a competitor) and shut down as superfluous, or because it is the non-surviving entity in a corporate merger. A closure may occur because the purpose for which the organization was created is no longer necessary.

While a closure is typically of a business or a non-profit organization, any entity which is created by human beings can be subject to a closure, from a single church to a whole religion, up to and including an entire country if, for some reason, it ceases to exist.

Closures are of two types, voluntary or involuntary. Voluntary closures of organizations are much rarer than involuntary ones, as, in the absence of some change making operations impossible or unnecessary, most operations will continue until something happens that causes a change requiring this situation.

The most common form of voluntary closure would be when a group of people decide to start some organization such as a social club, a band, or a non-profit organization, then at some point those involved decide to quit. If the organization has no outstanding debts or pending operations to finish, closure may consist of nothing more than the informal organization ceasing to exist. This is referred to as the organizers walking away from the organization.

If an organization has debts that cannot be paid, it may be necessary to perform liquidation of its assets. If there is anything left after the assets are converted to cash, in the case of a for-profit organization, the remainder is distributed to the stockholders; in the case of a non-profit, by law any remaining assets must be distributed to another non-profit.

If an organization has more debts than assets, it may have to declare bankruptcy. If the organization has viability, it reorganizes itself as a result of the bankruptcy and continues operations. If it is not viable for the business to continue operating, then a closure occurs through a bankruptcy liquidation: its assets are liquidated, the creditors are paid from whatever assets could be liquidated, and the business ceases operations.

Possibly the largest "closure" in history was the destruction of the Soviet Union into the composite countries that represented it. In comparison, the end of East Germany can be considered a merger rather than a closure as West Germany assumed all of the assets and liabilities of East Germany. The end of the Soviet Union was the equivalent of a closure through a bankruptcy liquidation, because while Russia assumed most of the assets and responsibilities of the former Soviet Union, it did not assume all of them. There have been issues over who is responsible for unpaid parking tickets accumulated by motor vehicles operated on behalf of diplomatic missions operated by the former Soviet Union in other countries, as Russia claims it is not responsible for them.

Several major business closures include the bankruptcy of the Penn Central railroad, the Enron scandals, and MCI Worldcom's bankruptcy and eventual merger into Verizon.