By Nellie Akalp
Entrepreneurs have faced more than their fair share of challenges these past few years, and 2022 has been no exception with inflation up and consumer spending down. Sadly, some business owners have decided to close their companies due to economic difficulties. Others may want to cease operations for other reasons, like retirement. Regardless of why someone chooses to close their business, it’s important for them to realize there’s more to the process than simply stopping selling products and services. There are additional requirements to legally end a business’s existence.
What a business owner must do depends on the type of business structure (eg, sole proprietorship, partnership, limited liability company, C Corporation), where the company is located, whether it has employees, and other factors. As you can imagine, there are both legal and financial considerations to address, so guidance from a reputable and reliable attorney, accountant, and tax advisor can help ensure all goes smoothly and no critical tasks get missed.
To follow is an outline of the tasks that might be involved when closing a business. If aiming to wrap things up neat and tidy by the end of the calendar year, business owners will need to get their affairs in order sooner rather than later.
An 8-point checklist for dissolving a business
1. Check the entity’s governance documents for procedures to follow
Different business structures have different internal governance documents that contain provisions for handling company matters. One of the situations they typically address is what happens when the business dissolves.
For example, a corporation’s bylaws might require that the organizers hold a meeting, conduct a formal shareholder vote, and gain approval by a certain majority of shareholders.
Entities’ internal agreements, like bylaws, partnership agreements, and limited liability company operating agreements, typically spell out what must happen to approve the dissolution of the business.
2. Verify the business entity is in good standing
Before dissolving or withdrawing a business entity in a state, the company must be in good standing, having followed through with all of its ongoing compliance responsibilities (such as filing and paying taxes, filing annual reports, maintaining a registered agent, renewing licenses, and more).
If a business has fallen out of good standing, it must do whatever the state requires to reinstate it before it can be dissolved. That might involve paying back taxes, submitting certain reports, filing for reinstatement, or other actions.
3. File Articles of Dissolution
LLCs and corporations must file Articles of Dissolution (some states call it a Certificate of Termination or Certificate of Dissolution) to officially dissolve the business entity with the state.
An LLC’s or corporation’s legal business name (the one in its Articles of Organization or Articles of Incorporation) will automatically be canceled when the dissolution is effective. Any business (including sole proprietorships and partnerships) that has used a fictitious business name (DBA) must cancel that name with the state or the local agency that approved it.
When an entity has foreign-qualified to conduct business in other states beyond its home state, it must also notify those states that it will be withdrawing from operations there. The procedures and paperwork required may vary depending on the state; generally, it involves submitting a withdrawal application and paying the associated fee for the filing.
4. Notify external stakeholders
It’s common decency—and sometimes required by law—for a business to notify creditors, vendors, and customers that it will be closing. Some states require business entities to publish a notice in a newspaper or other publication about its dissolution. This helps ensure that anyone who may be owed money or has any outstanding transactions with the business is aware of its closure.
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5. Make final tax filings and close tax accounts
Most companies will have tax-related tasks to attend to at the federal, state, and local levels. The rules and processes for wrapping up final tax obligations vary by jurisdiction. A business (and/or its owners) may remain responsible for federal, state, and local income and employment tax obligations until it closes its tax accounts with the federal, state, and local tax authorities.
Here is some general information about what businesses must typically do before closing their tax accounts. However, since things could get complicated, it’s wise for business owners to talk with their accountants or tax advisors for guidance.
Payroll tax and other employment-related tax responsibilities. Any business with employees that makes payroll tax payments and deductions for state unemployment insurance (SUI or SUTA) and state income tax (SIT) must submit their final payroll forms and pay payroll taxes after issuing their final payments to their workers. At the federal level, an employer must make final federal tax deposits and report employment taxes (including federal income tax withholdings, FICA, and FUTA). Also, the business must issue each employee a Form W-2, Wage and Tax Statement reflecting wages and salaries for the year. If the business paid independent contractors $600 or more during its final year, it must also issue 1099-NEC, Nonemployee Compensation to those individuals. Depending on the entity type and other factors, business owners may also have other forms and filings to complete.
Sales tax. Businesses that have collected sales tax on products and services must submit their final sales tax forms and payments to the state (or local) tax agencies.
income tax. Businesses must submit their final income tax returns and make any due payments. The IRS lists the requirements and forms to use for each entity type:
To cancel the business’s EIN (Employer Identification Number) and close its IRS business account, owners must send the IRS a letter that includes:
- Complete legal name of the business
- Business address
- Why the account is being closed
6. Cancel business licenses and permits
Many businesses need one or more licenses and permits to operate legally in their state or local jurisdiction. Business owners should inform each licensing agency that the company is dissolving and request to cancel licenses and permits.
7. Sort out assets and debts
A business may have physical assets (furniture, property, office equipment, etc.) and inventory that it can sell to generate cash before closing its operations. It may also have intangible assets (eg, patents, trademarks, copyrights, customer lists) that can bring in some funds.
Those monies could come in handy for paying any outstanding debts the business has and must settle with creditors, vendors, and suppliers before dissolving the company. If a business doesn’t have the funds to pay its debts, the owners may need an attorney’s help to understand and comply with the state’s laws for settling claims.
After debts are settled, remaining assets are typically divided among the business’s owners according to the terms of their internal governing documents (eg, partnership agreement, LLC operating agreement, bylaws).
8. Hold onto business records
Even years after a business closes, there could be questions or issues that arise regarding accounting records, taxes, and other matters. It is critical that business owners maintain records in a safe place in case of a legal investigation or a tax audit. Generally, seven years is a reasonable period for keeping tax documents and other information—of course, the longer, the better. The IRS website includes the periods of limitations for specific tax-related circumstances.
Consequences of not closing a business properly
Missing any required steps for closing a business could result in the business owners remaining responsible for compliance tasks and fees. That’s why it’s important to understand and follow through on all requirements.
I’ve covered many possible obligations, but there may be others depending on the entity type, business activities, state and local laws, and other considerations. Guidance from trusted professionals like an attorney, accountant, and tax advisor can help entrepreneurs weed through the uncertainties and develop a plan for dissolving their business by their preferred date without leaving any loose ends behind.
About the Author
Nellie Akalp is a passionate entrepreneur, business expert, professional speaker, author, and mother of four. She is the Founder and CEO of CorpNet.coma trusted resource and service provider for business incorporation, LLC filings, and corporate compliance services in all 50 states.
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