Closing a Sole Proprietorship

A majority of business owners in America are sole proprietors. All the good and bad parts of operating a business fall on your head, including deciding when to close.

Closing a sole proprietorship is easier than shutting down a partnership or corporation. You still need to follow state laws about paying taxes and closing accounts. With a bit of planning, a sole proprietor can close down a business as efficiently as a larger company.

Reasons for Small Business Dissolution

Larger businesses, such as limited liability companies (LLCs), partnerships, and corporations, may shut down for administrative or legal reasons. Sole proprietorships may close because the owner moves or has tired of running the business alone. Some other reasons sole proprietors may close include:

• Sale of the company: The owner decides to sell the company to another party for business or tax purposes.
• Bankruptcy: This could be the owner’s personal bankruptcy or a business bankruptcy after litigation. A sole proprietorship does not protect the owner’s assets like an LLC does, so a lawsuit can reach into the owner’s personal property. Bankruptcy or liquidation may be the only way to protect the owner’s assets.
• Incorporation or merger: If the owner decides to expand the business, the sole proprietorship dissolves.
• Death or disability: If the owner dies, their personal representative may have to finish winding up the business.

Most often, a sole proprietor simply stops doing business. There are a few steps to take to ensure the business does not incur any fines or fees after it shuts down.

Steps for Small Business Closure

You won’t need to file any articles of dissolution for your sole proprietorship or file anything with the Secretary of State. That is only done for LLCs and corporations who filed articles of incorporation or organization. You don’t need to do these steps in this precise order. If you have any concerns, talk to a small business attorney, or contact the Small Business Administration (SBA) for help.

Notifying Customers and Creditors

Notify your clients and customers you’re closing. Thanks to social media, this has become easier than it once was. Thank them for their patronage.

Tell your vendors your expected closing day so you can cancel any orders and get a final bill. Pay any outstanding invoices. Let your creditors know of the closing and arrange future payments for loans and other debts.

If you have employees, let them know according to your state laws. Some states have requirements for letting your workers know you’re planning to shut down a business. You may need to pay final wages the day you notify them you’re closing up shop.

Taxes

The Internal Revenue Service (IRS) has specific tax forms for sole proprietors. When you close the business, federal business tax and your personal federal tax returns are due. If you are liable for self-employment tax or sold or exchanged any property during the closure, you may also have tax obligations for that income.

If you have any employees, you must make a final employment tax deposit and file the employer’s quarterly federal tax returns, Form W-2s, and payroll tax forms. Your accountant can file these forms after the business has shut down.

After filing your final tax return, you must cancel your employer identification number (EIN). The IRS will not cancel your EIN until you have paid all your taxes. Filers can send a notice letter to the IRS with their EIN assignment form.

Business Licenses and Bank Accounts

If your business has a trade name, DBA ("doing business as") name, or fictitious business name, you must cancel it with the state or county agency that issued it. Cancel any business licenses and permits you received from the city, county, or state.

Your business bank account is the last thing you will close when you wind up your business. You must leave this open until all final checks and outstanding payments have cleared. Don’t forget to cancel any electronic payments or automatic transfers.

Selling Assets and Other Loose Ends

Sell any remaining stock, fixtures, and other business assets. Use this to pay your bills if you still owe creditors or vendors for outstanding debts.

If you have any accounts receivable, try to collect those. Depending on your type of business, you may not have outstanding payments. If you do, see about pulling them in. Once your business closes, you won’t be able to collect.

Keep all your income tax returns and business records in a safe place. Opinions differ about how long you must keep them. The IRS says you need to keep employee records for at least three years and other business records for at least four.

Get Legal Help Closing Your Sole Proprietorship

Even for a sole proprietor, there are a lot of things to accomplish before you can lock your doors for the last time. Make a checklist and set due dates for each step. If you need help with the best way to proceed, contact an experienced business attorney for legal advice.