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 dissolving 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.
Since you registered the business with a specific state or states, you must follow their regulations as to the process. Each state has different regulations on whether you can continue in business any form after dissolution.
Formally Dissolving a Business Type
The first step in closing a business is to notify your state that you want to end the business. This is called "dissolution" in state legal terms. In most states, there is a formal notification that must be filed. No formal dissolution process is required to end a sole proprietorship, but check the list of other business closing tasks below.
The process for formally dissolving a business type (other than a sole proprietorship) includes:
Resolution of Dissolution: The board of directors, partners, or members (of an LLC) must enact a resolution formally dissolving the business, and this resolution must be approved by the shareholders, partners, or members. 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.
State Notification: You must file Articles of Dissolution with your state Secretary of State. This document should include the information about the business entity, the reason for dissolution, and signatures of the appropriate individuals within the business entity.
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.
Working Through the Dissolution of a Business
There are three ways to work through this process of dissolution:
- You may decide you want to work through this process on your own. If you have a very simple dissolution with few or no assets and no employees, this might be possible. Check the website for your state Secretary of State for more information. There is typically only a small charge to you ($50 or less) for filing the Articles of Dissolution with your state.
- You may want to retain the services of an attorney. This is the most expensive option because it is based on hourly fees and impossible to estimate, but it is probably best if your dissolution is complicated or involves several states.
- You may want to use online forms for a relatively simple dissolution. There are a number of online sources of these forms, which walk you through the process. One site, USLegalForms, charges around $50.
The IRS has an excellent checklist for closing a business for your review.
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.
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
Distribution of Remaining Assets: After all creditors have been paid, the remaining assets must be distributed to shareholders, members, or partners.
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."
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 Wages, 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.
For a Sole Proprietorship, there is no paperwork to be sent to the state, but you must be certain that all business operations are shut down or sold and that creditors are paid off.