What to Do Before Closing a Business
Federal, State, Local Business Closing Requirements
It's time to close the doors. For whatever reason, you have decided to end your business. The list of tasks may seem long, but it's important to work through them to make sure everything is done correctly. Leaving a business closing task undone can mean continued liability for taxes or payments.
This business closing type is not bankruptcy, but it's called "dissolution," a closing down of the business as a legal entity.
You may need to follow some of these steps if your business has declared Chapter 7 (liquidation) bankruptcy, but you will have a bankruptcy trustee to help you through the process.
In addition to dealing with customers, vendors, suppliers, and employees, you will need to formally sever your relationships with federal, state, and local agencies, including the IRS.
Most business types must register with the state(s) where they do business. You must follow the regulations of your state, and each state has different regulations.
A sole proprietorship business isn't registered with a state, so that part of the process isn't needed. But check the list of other business closing tasks below.
Formally Dissolving a Business Type
If you have a business that is registered with your state, it's important to formally dissolve the business through the state's process. First, you'll need to have a resolution of dissolution, then filing a notice of dissolution with your state.
You may be wondering if it's necessary to formally dissolve your business with your state. Each state has a fee (sometimes called an annual or biennial report) or franchise taxes that you must pay. Dissolving your business stops those fees or taxes.
Resolution of Dissolution. Your business must have a formal agreement by the owners to dissolve the business. Even if you have a single-member LLC, it's a good idea to have this document. This is an internal document that doesn't need to be filed with the state, but there must be evidence that the shareholders, partners, or members have formally approved the dissolution.
The formal resolution of dissolution for a corporation might contain several sections, including:
- [Name of the corporation] be dissolved...in accordance with the laws of the state of [state name],
- The plan of liquidation and dissolution (a separate document) is approved and adopted,
- The shareholders authorize the dissolution and authorize filing documents with the state,
- The corporate officers are directed to do whatever is necessary to effect the dissolution.
Filing Dissolution Notice with a State. The dissolution document you file may be different for each state and for your specific business type.
Every state has a different process and different documents. The state may charge a fee for filing the documents. The dissolution notice must be filed with the state's business or corporation division, usually part of the Secretary of State's office
Here's an example for Florida:
A corporation must file Articles of Dissolution for a Florida Profit Corporation. The Articles include:
- The name of the corporation,
- The document number of the corporation,
- The date dissolution was authorized (by the board of directors),
- The effective date of dissolution, and
- A statement that the dissolution was approved by the shareholders.
The articles of dissolution for a Florida LLC include:
- The name of the LLC
- The date the LLC's Articles of Organization (registration document) were filed,
- A description of the reason for the dissolution
- If there are no members, the name of the person appointed to act to dissolve the company
- Signature of the authorized person.
Ending the specific business type may not mean that your business is closed. You may still be able to operate your business as a sole proprietorship because this business type doesn't require state registration. For example, if you are ending a single-member LLC, you could continue to be in business as a sole proprietorship. Ending a partnership or multiple-member LLC is more complicated.
Dissolution of a Business with Shareholders
If your business is a corporation with shareholders, you'll need a formal plan for liquidation and dissolution that describes how the process works for shareholders. This plan should include sale or liquidation of assets, payment of claims by creditors, cancellation of stock, and distributions to shareholders.
Other Business Closing Tasks
Sales Taxes: You must notify your state's taxing authority if you have previously registered with them to collect and pay sales taxes.
Payment to Creditors: You must notify creditors (those vendors to whom you owe money) of the dissolution and make arrangements to pay them by selling assets or by other means.
Payments to Employees: Notify employees of the closing. Make arrangements for final payments to employees. Check to make sure you comply with state and federal laws regarding these payments, including severance pay and final paychecks.
Employment Taxes: Continue to file payroll tax returns on Form 941 and unemployment tax returns on Form 940, and submit wage reports for employees and independent contractors as required, for the last year of the business
Closing Accounts/Canceling Employer ID Number: Close any business accounts you have, and close your business account with the IRS by writing to them at "Internal Revenue Service, Cincinnati, Ohio 45999." This will in effect close your Employer ID Number.
IRS Notification: The IRS must be notified of the dissolution. For a corporate dissolution, file IRS Form 966 within 30 days after the date of the resolution.
Final Income Tax Returns: When you file your federal income tax return for the last year of operations for your business, mark the return as "final."
See this IRS article "Closing a Business Checklist" for a complete list of closing tasks for federal taxes.
Notify Your City and County: Notify your city and county of your dissolution. You will need to cancel any "fictitious name/dba" filing, local tax accounts, or other ordinances.
Pay Taxes, and Fees: Finally, you will need to pay all taxes due to the IRS and state, and make certain that anything you owe is paid off.
You may be able to work through the process of ending your business on your own if the business is simple. For most business situations, especially for corporations, get help from an attorney and a CPA to make sure everything is done correctly and according to law.