Closing down your business takes more than just turning off the lights and closing the door. There several important issues -- legal, tax-related, and financial -- that must be addressed before a business entity is officially wound down. For example, you must repay all of your debts (assuming you're not filing for bankruptcy), take a final inventory of all assets, and generally tie up loose ends. Of course not all businesses close down in the same way, so it's often best to meet with your attorney after deciding to close shop.
Below is a guide to the steps an owner must take when closing the business's doors.
- Vote to dissolve: The owners of the business entity must agree to dissolve. Your articles of incorporation, partnership agreement, or articles of organization should contain provisions setting the rules for such a vote. If not, state statutes that govern your form of business will act as "fall-back" provisions by prescribing how a vote to dissolve must be conducted.
- Put a dissolution team together: This team should include your attorney, CPA, and a business valuation expert.
- List assets and take inventory: This is essential for the business valuation and is necessary in order to file your business's final tax returns.
- Get a business valuation: A valuation, while costly, may prevent future disputes from arising among the business's owners and provide evidence justifying the figures you use on your final tax return.
- Set a timetable: Be realistic. Closing a business will take time. Developing reasonable time frames for each step of the dissolution process will insure that you do not over extend yourself by taking a new position or planning to relocate too soon.
- Make the announcement: You do not want your creditors, customers, and especially your employees to learn that the business is closing from anybody but you. Uncertainty may cost you additional revenues while preparing to close, and disgruntled and/or deserting employees will hinder your dissolution process.
- Work out contracts and obligations that extend beyond your closing date: Negotiate final payments on automobiles, office equipment, and leases. Also inform insurance companies and utility companies of your closing date.
- Close the business: Terminate production, sales, and services.
- Dispose of assets: This is also a good time to terminate your business insurance coverage.
- Pay off the business debts: Even if your business is in relatively good shape, you may be able to negotiate your debts down somewhat, since creditors know it's often difficult to collect on debts after a business has closed down.
- Prepare final tax returns: This step requires preparing both federal and state tax forms. These forms will be more complicated than the annual returns that your business prepares. If your business hasn't consulted a tax expert prior to dissolution, this is the time to do it.
- File dissolution papers with the state: Corporations, limited liability companies, limited partnerships, and limited liability partnerships are required to notify the state that they have dissolved. Although a general partnership is not required to register, it is still a good idea to consult your attorney about a way of making your dissolution known to the state.
- Prepare final forms for federal, state, and local governments: Every agency that registered your business, issued you a license, provided you with tax numbers, or played a role in getting your business up and running should be notified of your dissolution. Check FindLaw's state guide to chambers of commerce for help.
- Close the business bank account
- Keep all business records and other business documents for seven years: This will provide you with peace of mind in the event the Internal Revenue Service decides to audit your business somewhere down the road.
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Closing Down Your Business? Talk to a Lawyer First
If you already have been working with an attorney, then he or she likely will be involved in the process of winding down your business. But if you don't have an attorney on retainer or haven't worked with one in a while, you should probably consult with one when closing down. Find a business and commercial law attorney near you.