Not surprisingly, it’s been a few tough years for U.S. businesses due to the pandemic, according to a recent study by the Federal Reserve. For the service sector, business closures have been exceptionally high. The study reported the “permanent exit of more than 100,000 establishments above and beyond historically normal exit levels during the 12 months of March 2020 through February 2021.”
How to Legally Close a Business Before the End of the Year
So if you’re facing the challenging task of closing a business but have not yet begun the process, it’s a good idea to legally close the business before year-end. Here’s why.
Why Closing a Business Legally Matters
Just like you took the official (and legal) steps to start your small business, legally closing a small business is just as important. Forming your business under state and federal regulations made your company legitimate; therefore, the company is a living entity until you tell them it’s not. However, simply hanging an “out-of-business” sign isn’t enough: Have you filed the proper paperwork and paid off the business’s debts? Filed the business’s final tax forms?
Until the company is officially closed (or dissolved), the state and the Internal Revenue Service (IRS) expect your company to file annual reports, pay company taxes, and renew permits and licenses. Therefore, not legally closing a business could lead to unexpected liabilities and unwanted fees.
Closing a business before year-end not only allows you to start the new year with a clean slate, it also means you won’t have to deal with tax returns, fees, and document filing because your business was still considered open in the new tax year. Here are five stages necessary to closing a business before the year sails into the sunset.
1. Take a Vote
Closing a small business for a sole proprietor with no employees is as easy as starting one. Your to-do list includes closing the doors and/or taking your website down, delivering a “closing a business letter” to customers and vendors, paying off debts, selling assets, and informing the IRS (more on that later).
If you own a partnership, corporation, or Limited Liability Company (LLC), closing a business requires you first to take a vote. Because business structures are state-formed legal entities, the rules for dissolving a company vary by state. However, dissolution requirements should have been documented in the partnership agreement or operating agreement. Typically, in a partnership or LLC, all or most of the partners must agree to close the business before the company can start the dissolution process. LLCs and corporations should also take a formal vote with a majority agreeing to close. Plus, if the corporation had issued shares, two-thirds of the voting shares must agree.
2. File Dissolution Papers
Following the official vote, the company must file Articles of Dissolution with the Secretary of State’s office in the company’s home state. Also called “Certificate of Termination/Certificate of Dissolution,” failure to file these notifications means the business is still legally open as far as the state is concerned. For companies doing business in other states, the company must file for withdrawal with those states and cancel all out-of-state registrations. While procedures for withdrawing a company vary by state, there is typically a withdrawal application to submit and a filing fee to pay.
In addition, make sure to cancel any local permits, licenses, and business names in all states where you previously conducted business. Filing dissolution documents should cover some requirements; however, if the company registered a fictitious business name (DBA), there is a separate filing process for that cancellation.
3. Check Good Standing Status
Before closing a business legally, the company must be in good standing with the state. All fees should be paid, paperwork should be filed on time, and the company’s financial obligations should be settled (vendors, employees, payroll taxes, sales taxes). Business owners unable to pay off the company’s debt might need to consider filing for bankruptcy and letting the courts settle the assets. Businesses structured as corporations and LLCs are obligated to pay off creditors before leftover monies or assets are dispersed to shareholders.
What to do with assets when closing a business? Typically, business owners sell off any assets when closing a business. The Small Business Administration (SBA) suggests preparing an inventory list and hiring a qualified appraiser to determine the value of the assets. Then hire an auctioneer, dealer, broker, or another expert to conduct the sale.
4. Notify the IRS
For the IRS, closing a business requires sending a letter informing the agency you wish to close your business account. Be sure to include the company’s legal name, the Employer Identification Number (EIN)/Tax ID number, and the business address. Corporations must also file Form 966, Corporate Dissolution or Liquidation.
5. File Final Taxes
You don’t have to wait until April 15 to file your final tax return. After following the previous steps, file the final wage reports, capital gains and losses, and employment tax returns. Check the box labeled “final return,” and most likely, that will be that. If the IRS has any questions about your final return, you’ll be sent a letter with instructions on what to do next.
Closing a business may seem like a daunting endeavor, but taking care of it now, before the year ends, will save you a lot of headaches in the year ahead.