Necessary Steps to Dissolving Your Company
One of the grim statistics of starting a business is knowing that almost half of all small business startups will no longer exist five years later. According to the Small Business Administration (SBA), the reasons both big and small businesses fail are as many as the companies themselves. When a company shuts down, it can't just close the doors one last time and send everyone home. It may take many months or even years to close a business.
This timeline for dissolving, closing, or winding down a business gives business owners some idea of what to expect if their business isn't successful. No one wants to plan for failure, but business owners should prepare for the worst as they work for success.
Your Business Structure Determines How To Close Your Small Business
If you're a sole proprietor, you don't need to worry about closing according to the requirements of business documents. It's an unwelcome event but a decision you make on your own. You do not need to consult with partners or board members.
If your business is a general partnership that doesn't have a written partnership agreement, give written notice to your partner. Let them know of your desire to withdraw from the partnership.
Suppose your business has a written partnership agreement, LLC, or a corporation. In that case, you must follow the rules of dissolution contained in your business documents. Usually, company documents need a two-thirds or majority vote to dissolve.
These operating documents should be in the company's records and filed with your state's secretary of state. If ending the business is what you want to do, be sure to follow the rules to avoid disputes later on. You may need to call a board of directors meeting or make an announcement to shareholders.
The rest of the dissolution process will take time. The actual amount of time depends on your type of business and the reason(s) for dissolution. You can expect it to last at least several months. Having a business checklist can make the process easier.
Steps To Closing Your Business
The process of closing a business mirrors the process of opening one. Like starting a business, ending your business begins by ensuring everyone is on board with the dissolution of the business.
If your company has articles of organization or bylaws, they should include a process for voting on dissolution. If your company does not have this, state laws determine how you need to inform your members and close your business.
Notification of Employees
The Federal Worker Adjustment and Retraining Notification (WARN) Act requires eligible employers to notify employees at least 60 days before mass layoffs or plant closings. The WARN Act does not apply to most small businesses. Many states, such as California, have versions of the act, which may be more restrictive than the federal act.
All states have requirements on when employees must receive their final paycheck following a business closure. In some states, it is the day of notification. Time your closing and notification so you can make payroll and meet all other financial obligations.
Notification of Creditors and Vendors
Cancel contracts and leases according to their terms. For instance, if you have a lease on your building that requires you to give 60 days' notice, you must give the landlord 60 days or risk losing any deposit. You are liable for paying costs for breaking the lease.
Contracts for goods or services should have cancellation clauses. They may also have liquidated damages clauses for breach or early termination. As with notifying your employees, give yourself plenty of lead time to cancel any contracts before officially closing your business.
You'll need to inform lenders, insurers, suppliers, vendors, and service providers that the business will no longer be contracting for their services.
Corporations and LLCs need to inform creditors:
- The company has been dissolved or intends to dissolve
- The new mailing address to send claims
- Deadlines to submit claims (120 days from the date of the notice)
Certain states may also require a dissolving company to place an ad in the local newspaper or other publication announcing the closing.
Pay Final Taxes
When you end a business, the company is still liable for any taxes for the prior and current year. This means you must continue making deductions from paychecks and payroll reporting obligations. You must file your quarterly or annual taxes and capital gains and liquidations forms.
You'll also be responsible for filing all final tax forms. This includes income tax, any sales tax collected, and payroll taxes. Certain federal tax forms (such as the federal unemployment tax return and the employer federal tax return) contain checkboxes indicating that it will be the last return filed by the business. You'll need to watch out for tax due dates that differ from the norm. For example, partnerships need to file a Form 1065.
The IRS has income tax forms for the final year of a business. Limited liability companies and corporations have their own forms for the final year. Employers need to file their final payroll taxes and make final tax deposits. After paying all taxes and closing all other business accounts, you must cancel your employer identification number (EIN). You can only do this once you file your final tax return with the IRS.
Of particular concern to the IRS, and therefore to all business owners, is the payroll tax. Payroll taxes that remain unpaid after a business closes are a big deal to the IRS.
The IRS has a comprehensive checklist for business owners who are preparing to shut down. The checklist contains the required forms.
File Articles of Dissolution
If you filed articles of incorporation to start your business, you must file articles of dissolution to end it. File these documents at the secretary of state's office.
Filing a certificate of dissolution (also known as articles of dissolution) is a process that varies from state to state. In some states, filing this certificate must happen before notifying creditors, while in other states, you must notify creditors first. In either case, creditors' claims need resolution in some fashion — either by payment in full, a compromise with them, or bankruptcy.
Additionally, in some states, you must clear your back taxes before the state will allow you to file for dissolution. This so-called "tax clearance" comes from the state's tax agency and states that the business is current on its taxes.
Cancel Business Licenses
Cancel all business licenses and permits under your business name. Terminating business licenses and agreements helps keep you in good standing with other companies if you decide to establish a new business. Canceling permits and licenses can be time-consuming, depending on the nature of the license. You may need a certificate of dissolution for city or state permits.
Resolve All Financial Obligations and Collect Money Owed
Notify lenders and other business entities you do business with and arrange continued payment of outstanding loans. If you know your remaining assets will not cover your business debts, you may want to negotiate payment or forgiveness during dissolution. As with canceling your business licenses, this procedure may take longer than shutting down the business itself.
Collect any monies owed to the company. Try to collect this money as soon as possible, as it will be much harder to collect money on behalf of a company that no longer exists.
Sell and Distribute Your Assets
After you've settled the claims of your creditors, all that's left is the business assets, both tangible (e.g., business equipment or stocks) and intangible (trademarks and goodwill). The distribution of these assets is proportional to the stake of each owner in the business. If you have stock or financial assets that need to be distributed to owners, consult an attorney to advise you about state laws governing such procedures.
After the Business Closes
Although your dissolution is done once you file the final taxes and articles of dissolution, you still need to keep some things open and active.
- The business bank account should stay open until all financial transactions are complete. Keep this account open until you pay all your taxes, including any sales taxes you may owe. Don't forget any electronic transfers, employee paychecks, credit card bills, and outstanding bills.
- Keep all business records for seven years. The Internal Revenue Service wants you to keep employment tax records for four years. Keep property tax records according to your state's statute of limitations laws. Most financial experts recommend seven years as a safe period of time for business records.
Frequently Asked Questions About Closing a Business
As you can see, closing a business is like juggling. None of these steps are complete until the others are. Below, we answer some of the most frequently asked questions about closing a business.
Does my partnership have to do all this to shut down? What about a sole proprietorship?
Any company registered with your state's secretary of state needs to file dissolution documents. A sole proprietor registered as a limited partnership or professional limited liability company (PLLC) needs to carry out this process.
Do I need to cancel my EIN if I close my business?
Yes. You need to cancel your Employer Identification Number with the IRS. The IRS requires you to cancel your EIN by sending a letter with the following information:
- The complete legal name of the business
- The business EIN
- The business address
- The reason you wish to close the account
- The copy of the EIN notice assigning your EIN
You can mail it to the IRS.
What happens if I just close up and walk away?
No matter your business structure, if you do not officially dissolve, you will still be liable for state taxes, requirements such as annual reports and filing fees, and other requirements under state law. The state may shut down your company if you are not doing business. You can also face fines and legal action in addition to catching the interest of the IRS.
What's the difference between dissolution and liquidation?
A liquidation or administrative dissolution occurs when the court takes over a failing business while it still has assets. The court may order a liquidation during bankruptcy proceedings. A liquidator sells off remaining business assets to pay creditors and business debts.
What is the difference between liquidation and reorganization?
In a reorganization, the business owner remains in control of the business under certain terms and conditions and attempts to pay off creditors under a new operating agreement. Creditors may agree to the new arrangement if they have a better chance of payment than under a liquidation.
Talk to a Lawyer Before Dissolving Your Business
Shutting down a company is a challenging process with many potential pitfalls. When navigating a business dissolution, meeting with a business lawyer makes sense. They will know what to expect and can guide you through the process. Finding a business and commercial law attorney can help you prepare for what comes next.
You Don’t Have To Solve This on Your Own – Get a Lawyer’s Help
Meeting with a lawyer can help you understand your options and how to best protect your rights. Visit our attorney directory to find a lawyer near you who can help.
Contact a qualified business attorney to help you tie up all loose ends when closing your business.