By Nellie Akalp
Entrepreneurs have faced more than their fair share of challenges in recent years, and 2022 was no exception with rising inflation and declining consumer spending. Unfortunately, some entrepreneurs have decided to close their business due to economic problems. Others may wish to cease operations for other reasons, such as retirement. Regardless of why someone chooses to close their business, it’s important for them to realize that there’s more to it than just stopping selling products and services. There are additional requirements to legally terminate a company’s existence.
What a business owner must do depends on the type of business structure (e.g., sole proprietorship, partnership, limited liability company, C Corporation), where the business is located, whether it has employees, and other factors. As you can imagine, there are both legal and financial considerations that need to be addressed, so guidance from a reputable and trustworthy attorney, accountant and tax advisor can ensure that everything runs smoothly and that no critical tasks are missed.
The following is an overview of the tasks that may be involved in closing a business. If entrepreneurs want to get everything neat and tidy at the end of the calendar year, entrepreneurs have to get their affairs in order sooner rather than later.
An 8-point checklist for dissolving a company
1. Review the entity’s governance documents for procedures to follow
Different corporate structures have different internal governance documents that contain provisions for handling corporate affairs. One of the situations they typically address is what happens when the company is dissolved.
For example, a company’s bylaws may require the organizers to hold a meeting, hold a formal shareholder vote, and get approval from a certain majority of shareholders.
Internal agreements of entities, such as articles of incorporation, partnership agreements, and limited liability company agreements, typically describe what must be done to approve the dissolution of the company.
2. Check whether the business entity is in good standing
Before dissolving or withdrawing a business entity in any state, the business must be in good standing and have performed all ongoing compliance responsibilities (such as filing and paying taxes, filing annual reports, maintaining a registered agent, renewing of licenses and more).
If a company has lost its good reputation, it must do whatever it takes for the state to restore it before it can be wound up. This may include refunding taxes, filing certain reports, filing a recovery request, or other actions.
3. Submit Termination Articles
LLCs and corporations must file dissolution articles (some states call it a Certificate of Termination or Certificate of Dissolution) to officially dissolve the business entity with the state.
The legal business name of an LLC or corporation (the name in the Articles of Incorporation or the Articles of Incorporation) is automatically canceled when the dissolution is in effect. Any business (including sole proprietorships and partnerships) that has used a fictitious business name (DBA) must cancel that name with the state or local agency that approved it.
When a foreign entity is qualified to conduct business in other states outside its home state, it must also notify those states that it will withdraw its operations there. The procedures and paperwork required may vary by state; generally it involves submitting a withdrawal request and paying the corresponding filing fee.
4. Inform external stakeholders
It is normal—and sometimes required by law—for a business to notify creditors, vendors and customers that it is 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 owe money or have open transactions with the company is aware of its closure.
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5. Prepare Final Tax Returns and Close Tax Accounts
Most companies have tax-related duties at the federal, state, and local levels. The rules and processes for finalizing final tax liabilities vary by jurisdiction. A company (and/or its owners) may remain responsible for federal, state and local income and employment tax liabilities until it closes its tax accounts with federal, state and local tax authorities.
Here’s some general information about what businesses typically need to do before closing their tax accounts. However, as things can get complicated, it makes sense for business owners to talk to their accountants or tax advisers for advice.
Payroll tax and other employment-related tax liabilities. Any company with employees that makes payroll tax payments and deductions for state unemployment insurance (SUI or SUTA) and state income tax (SIT) must file their final payroll forms and pay payroll taxes after making their final payments to their employees. At the federal level, an employer must file final federal tax returns and report employment taxes (including federal withholding tax, FICA, and FUTA). Also, the company must provide each employee with a Form W-2, Wage and Tax Statement showing the wages and salaries for the year. If the company has paid independent contractors $600 or more in the last year, it must also provide 1099-NEC, Non-mployee Compensation, to those individuals. Depending on the type of entity and other factors, business owners may also need to fill out other forms and filings.
VAT. Companies that have collected VAT on products and services must submit their final VAT forms and payments to the national (or local) tax authorities.
Income tax. Businesses must file their final income tax returns and make any payments due. The IRS lists the requirements and forms to use for each entity type:
To cancel the company’s EIN (Employer Identification Number) and close the corporate IRS account, owners must send the IRS a letter stating:
- Full legal name of the company
- Company Address
- Why the account is being closed
6. Cancel business licenses and permits
Many businesses require one or more licenses and permits to operate legally in their state or local jurisdiction. Business owners must notify each licensing agency that the business is being dissolved and must request licenses and permits to be canceled.
7. Sort Assets and Debts
A company may have physical assets (furniture, real estate, office equipment, etc.) and inventory that it can sell to generate money before closing its operations. It may also have intangible assets (e.g. patents, trademarks, copyrights, customer lists) that can generate money.
Those funds can come in handy to pay off any outstanding debts the company has and must settle with creditors, vendors and suppliers before the company is wound up. If a company doesn’t have the money to pay its debts, the owners may need the help of a lawyer to understand and follow state laws for settling claims.
After the debts are settled, the remaining assets are usually distributed among the owners of the company according to the terms of their internal governance documents (e.g., partnership agreement, LLC business agreement, articles of association).
8. Store business data
Even years after a business has closed, there can be questions or problems related to accounting records, taxes, and other matters. It is critical that business owners keep their data in a safe place in the event of a legal investigation or tax audit. In general, seven years is a reasonable period for keeping tax documents and other information – of course, the longer the better. The IRS website contains the periods of restrictions for specific tax-related circumstances.
Consequences of not closing a business properly
Missing the required steps for closing a business can leave the business owners responsible for compliance duties and fees. Therefore, it is important to understand and comply with all requirements.
I have covered many potential obligations, but there may be others depending on the type of entity, business activities, state and local laws, and other considerations. Guidance from trusted professionals such as a lawyer, accountant and tax advisor can help entrepreneurs overcome the uncertainties and develop a plan to dissolve their business on their desired date without leaving any loose ends.
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 source and service provider for business incorporation, LLC filings, and business compliance services in all 50 states.