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Closing your business can be a complicated process that requires working with the Internal Revenue Service (IRS), making sure you pay off your debts and canceling accounts and permits.
The process will vary depending on your business entity. If you have a partnership, limited liability company (LLC) or corporation, you may have to consult with people to sign off on a dissolution. That’s why it’s important to follow through on all the required steps. That includes notifying the right people and institutions of your plans to dissolve your business. To make it happen, even if you’re the sole owner, you’ll probably want to work with professionals like attorneys and accountants.
Step 1: Get approval from all stakeholders
Unless you’re the sole owner, you’ll need to form a plan with your business partners before you can move forward with closing down a company.
Limited liability company: If your business is an LLC, the members may vote at any time to dissolve the company. The vote procedure might already be a part of your operating agreement, but if it’s not, check with your state’s secretary of state office to find out the dissolution procedure. Once you take a vote, draft a resolution and make it a part of the company’s official records.
Corporation: If your company is set up as a corporation you need to hold a meeting of your board of directors and vote to dissolve the corporation. If that vote goes ahead, then any shareholders would need to approve the dissolution. How many shareholders need to approve the dissolution of the company will be dependent on your state, but it’s possible that a majority may be required. If the majority of shareholders approve, public corporations must file a notice of intent.
Partnership: If your business is a partnership, you and your partners will need to vote to dissolve the business, a decision you should put in writing. If there are outstanding debts, you’ll need to come up with a written agreement for how much each partner owes. If the partnership is insolvent, it’s a good idea to contact a lawyer. Also file a dissolution of partnership form with your state and you may also want to publish a notice in a local newspaper, too, to give creditors warning.
In some cases, dissolving a business may not be voluntary. A judge can order a business to dissolve for reasons like not complying with state laws, not paying taxes or as the result of a lawsuit brought by members of an LLC. A secretary of state’s office can also order an administrative dissolution, which might happen if a business doesn’t follow state laws or doesn’t file an annual report.
Step 2: Pay off outstanding debt and taxes
When you close a business, outstanding debts don’t just disappear. You’ll need to send a letter to anyone to whom you owe money. That’s not just a courtesy, it’s a legal obligation.
The people you need to notify include:
- Service providers
Some states may also require you to notify the public of your dissolution by taking out a newspaper ad. After all creditor claims have been submitted, it’s time to either pay the bills, work out a payment plan or come to a settlement with the creditor. If your company is closing because it’s financially unhealthy, a creditor may be willing to accept less than what you owe.
And while in most cases, you don’t need your employees’ approval to close your business, you have several obligations to your employees including their final paychecks with the value of accrued, unused vacation days, if your state requires it. Though it may not apply to many small businesses, U.S. Department of Labor requires that businesses with more than 100 employees to give 60 days notice of a closing or layoff that would affect 50 or more workers.
Finally, don’t forget to notify the government. If you don’t properly dissolve your business, you could continue to be taxed. Make sure to file state and federal tax returns and check the “final return” box on the form if applicable. If your business collects sales tax, you should also file a final sales tax form with your state and write “final” at the top of the form.
The deadline for filing federal tax returns again varies by business entity.
Sole proprietors: Since sole proprietorships are not taxed separately, report income, expenses, gains and losses on Schedule C of the Form 1040 as you normally would by April 15 the year after you close your business. There is no final return box to check.
Partnerships and LLCs: Likewise, single-owner LLCs are “pass-through” businesses where income is passed down to the owner’s personal taxes. LLCs with more than one owner and partnerships also claim profits or losses on their personal taxes accompanied by a Form 1065. It must be filed by the 15th day of the third month after your tax year ends.
C corporations: Corporations and LLCs that elect to be taxed as one prepare separate corporate tax returns. File your usual Form 1120 by the 15th day of the fourth month after you close your business.
S corporations: S corporations follow a similar procedure as C corporations, using Form 1120S. It must be filed by the 15th day of the third month after your business is closed. Both C corporations and S corporations should also file Form 966 to notify the IRS of a corporation dissolution or liquidation.
Depending on the type of business, and whether you have employees, you may be responsible for filing additional forms as found on this IRS checklist.
Step 3: File certificate of dissolution with the secretary of state
Your business is a legal entity, so when you close your business, you’ll need to file a legal form called a certificate of dissolution. This form officially dissolves the articles of organization you filed with your state to become an LLC or a corporation. This is usually handled by your state's secretary of state office (contact table below).
Then notify the IRS using its corporate dissolution or liquidation form. After you file your final tax return, some states also require you to get a tax clearance or consent to dissolution document. That document proves that you are current on your taxes and your business is free from liens.
Step 4: Close your accounts
When you notify your creditors that you’re closing up shop, you’re supposed to outline how you will end your relationship with them. Now it’s time to follow through on closing all your business bank accounts and credit lines and repaying any outstanding debts.
You should also cancel any business registrations, permits, licenses and your Employee Identification Number (EIN). Essentially anything that suggests you’re an operating business, including your trade name or doing business as (DBA) name, any required city or county business licenses and seller’s permit.
Step 5: Asset distribution
Before distributing any assets to ownership, you must have paid off all of your debts and taxes. This includes setting aside some funds in case creditors come forward after your business has been resolved seeking repayment. In the case that you have assets left to divvy up, they should be disbursed based on the share of ownership.
Sole proprietor: After paying debts and loans, any remaining money and assets belongs to the owner.
Corporation: The cash and assets are totaled and then divided evenly by the number of shares. Each shareholder is paid proportionately to the number of shares they hold.
LLC and partnership: Assets are divided based on what is in each member’s capital account. These are the accounts that hold the initial investment of all members and partners and where profits are allocated.
If you plan carefully, do your research and work with experts where needed, that can go a long way toward ensuring you don’t miss an important step in closing down your business. Don’t forget to keep written records of your actions, too. A good guideline is to hang onto those records for three to seven years after you close the business.