Closing a business properly means knowing the right steps and following the law. Different types of businesses, like a sole proprietorship, partnership, LLC, or corporation, each have their own rules for shutting down. You’ll need to file the final tax returns and cancel your EIN. It’s important to follow the IRS’s detailed instructions and to also check with your state’s Secretary of State1.
For those who use QuickBooks Online Advanced, the job can get easier. You can upload 1000 transaction lines for invoices at once2. It’s also smart to look into COVID-19 relief options. Using tools like the COVID-19 Business Tax Relief Tool can be very helpful during your business’s closing phase. These steps are crucial to avoid any legal issues or future problems1.
Key Takeaways
- Understand the federal, state, and local regulations for business dissolution steps.
- Each business structure has specific requirements for filing and reporting.
- Maximize the efficiency of the closure process with QuickBooks Online Advanced’s features2.
- Consulting with professionals can help ease the process and ensure compliance1.
- Consider COVID-19 tax relief options and tools available for support.
Understanding Business Dissolution
Business dissolution is when a corporation or LLC legally ends. It helps protect owners from future liabilities. Dissolution can happen willingly or by force.
What Is Business Dissolution?
Basically, business dissolution stops a company for good. It makes sure the business stops all operations. The business won’t rack up more liabilities. Filing the right forms with state and federal agencies is necessary to legally close.
Types of Dissolution: Voluntary vs Involuntary
Two main kinds exist: voluntary dissolution and involuntary dissolution.
Voluntary Dissolution: Owners choose to shut down the business. They file necessary paperwork, tell creditors, pay debts, and close accounts3. They must also settle any taxes with the state before closing4.
Involuntary Dissolution: The state can force a business to close. This may happen if a business doesn’t follow laws, like not filing reports or paying taxes3. Not handling this right can lead to fines and other serious issues3.
Knowing the difference between voluntary and involuntary dissolution helps. It lets you end your business correctly. This way, you avoid risks from not closing it properly.
Getting Approval from Owners and Shareholders
Before a business can close, it’s key to get the thumbs-up from the owners and shareholders. This ensures everything goes smoothly and by the book. You’ll want to start by checking the corporate bylaws or the LLC’s rules. These documents tell you how to get the green light for shutting down.
Following these steps helps avoid any issues later. It makes the entire process clear and straightforward.
Drafting and Approving a Resolution
For corporations, the board starts by creating a resolution5. This document suggests it’s time to dissolve the business. Shareholders then need to vote on it. Each state has its own rules on whether you need most or two-thirds of the vote to pass it5.
Shareholders get the details about the vote in advance. This way, they have enough time to think it over5. For LLCs, members follow what’s written in their agreement. They vote and keep detailed records of these decisions5.
Documenting the Decision
Keeping track of the decision to dissolve is vital. After the vote, it’s important to document everything. This includes how many voted for and against, and meeting notes5. These records show that the dissolution followed the rules. They’re also helpful if there are legal questions later6.
LLCs need to do the same through their own agreements. This paperwork proves the process was legitimate5.
Filing Articles of Dissolution
Shutting down a business involves a key step: filing the Articles of Dissolution. This acts as your official notice to the state that you’re closing your doors. Different states have their own
State Requirements for Filing
The process for filing Articles of Dissolution changes depending on the state. Typically, you need to file with the Secretary of State’s Office in the formation state of your corporation or LLC. This step helps you avoid extra costs and taxes later on7. Make sure you settle all taxes by getting a tax clearance before filing the Certificate of Dissolution8.
Not following the right steps can result in ongoing taxes, fines, and additional charges7. Some states mandate that businesses inform their creditors in advance, providing between 90 and 180 days to make claims8. This is crucial for resolving business debts and limiting later claims.
Timing and Process
Filing times and procedures also vary. Typically, it takes 2-4 weeks to file the Articles of Dissolution, but faster service is available for a fee7. In places like New York, the regular filing cost is $60. But, for quicker processing, fees range from $25 to $1509. You can pay via cash, check, money order, or credit card. Remember, card payments need an authorization form9.
So, be sure to understand your state’s specific filing requirements. Consider getting advice from a professional to ensure a smooth closure. This helps prevent legal or financial issues.
How to Close Down a Business with the IRS
When you close a business, it’s key to file everything right with the IRS. You’ll need to submit your final tax returns and detail contractor payments. This makes sure your business wraps up without issues.
Filing Final Tax Returns
Different businesses need to file different forms. If you’re on your own, use Schedule C with your tax return10. Partnerships hand in Form 1065 for their final year11. Corporations have several forms to file, like final income tax and employment taxes12.
Businesses with staff must file federal tax returns for their final quarter. This includes Form 941 or Form 9441011. Don’t forget Form 940 for the last wages of the year1011. Keep all employment tax records for at least four years1211.
For selling property, keep your records until the time limit ends for that year1011. Sole proprietors, look at Publication 334 for closing tips10. You also need to send a letter to the IRS with your business details and reason for closing1011.
Reporting Payments to Contract Workers
If you paid a contractor over $600, report it with Form 1099-NEC1011. This keeps you in line with IRS rules when shutting down. Corporations should also file Form 1096 with their 1099-NEC forms12.
Keeping accurate records and meeting deadlines helps close smoothly. By doing so, you’ll avoid problems and fulfill your IRS duties properly.
Settling Outstanding Debts
When shutting down a business, it’s crucial to clear all debts quickly. Doing this shields you against legal problems later on.
Notifying Creditors
Telling your creditors that your business is closing is vital.Creditor notification prevents confusion and lets them make their claims in time. Surprisingly, only 10 states need you to tell creditors this way13. Always check the laws in your state and give clear instructions for making claims.
Paying Off Liabilities
Once creditors are notified, the next step is to pay off debts. Many small firms struggle with this, which can complicate ending the business. About half of them close within the first five years because they run out of money or are too deep in debt14. Making debt payment a priority helps smooth the shutdown process.
If money is tight, try working out deals or payment plans. This can help especially with unsecured debts, like credit lines and loans15. Open and friendly discussions with creditors may lead to agreements that work for both.
Handling Insolvency
If there’s not enough money to pay off debts, you’re looking at insolvency proceedings. This might mean getting a bankruptcy lawyer to help sort things out. For temporary debt issues, Chapter 11 bankruptcy may be the way to go14. Chapter 7 bankruptcy might be best for clearing debts you promised to pay yourself, giving a clean slate14.
For corporation or LLC owners, know how much debt you personally owe. These business types usually protect you, but you may still owe company taxes15. Make smart choices to protect your money as you wind down your business.
Taking Care of Employees
Business closures demand careful handling of employee-related issues. This means making sure final paychecks are sent out on time and settling all employment taxes. It also means properly stopping employee benefits. By communicating effectively and setting clear deadlines, you help employees understand and accept the situation.
Final Wage Payments
Paying final wages promptly is required by law in every state. Owners must follow their state’s rules for when to hand out the last paychecks16. This includes paying for worked hours and unused vacation time16. To keep workers until the end, consider a $2,000 stay bonus17. Sharing written information about the closure helps employees get all the details17.
Resolving Employment Taxes
It’s important to continue handling employment taxes right until the final working day16. Businesses should also file the necessary paperwork like Form W-2 for the last wages. Keep tax records for four years to avoid any trouble with the law after closing.
Handling Employee Benefits and Pension Plans
Following the right steps for ending employee benefits and pension plans is vital16. This might mean stopping company retirement and health savings accounts16. Companies should also collect any items they own, like phones or laptops. It might be nice to offer unused equipment, like office furniture, to employees at lower prices17. Doing so eases the transition for everyone.
Show appreciation to minimize stress among staff. Team activities and regular communication can boost morale and create a supportive atmosphere18. Such efforts make closing your business smoother and kinder for all involved.
Canceling Licenses, Permits, and Registrations
When you decide to close your business, you need to end your business registration properly. This means getting rid of any licenses, permits, and registrations your company has. Doing so stops future issues like unknowing usage or fees for renewal.
Business Name Registrations
If your business used a made-up name, you have to tell the government you’re not using it anymore. This is done by filing a “statement of abandonment.” Also, it’s crucial to alert the Department of Consumer and Regulatory Affairs. This prevents them from asking you for more money for renewals19
Business Licenses and Permits
To run a business legally in most places, you need a business license20. If you don’t keep this license up to date, it might be taken away21. If your business had a Basic Business License, you must ask the right office to cancel it19. If you ignore this, you might have to pay extra fees or taxes19.
Before starting a business, getting the correct licenses is key20. Make sure to cancel any permits, like seller’s permits or sales tax licenses to dodge penalties. This could be fines or even jail time if the law finds unapproved business operations20. Always keep records to show you followed all the steps to officially close your business.
Handling Final Financial Matters
When you shut down your business, it’s key to handle financial tasks well. This means you should close any business bank accounts and cancel any company credit cards. Doing this stops unauthorized use and avoids extra charges.
Closing Business Bank Accounts
Start by closing your business’s bank accounts. Make sure all transactions are done and there’s nothing pending. Get back any deposits or fees you’ve already paid. Talking to your bank clearly will help make things smooth. It’s wise to keep personal and business finances separate22.
Canceling Business Credit Cards
Then, move on to canceling your business credit cards. Contact your card issuer to stop all cards and pay off any left balances. It’s crucial to do this to avoid future problems and misuse. Good credit is important for borrowing money, so keep your credit score healthy22. Also, managing your money well can keep you out of financial trouble23.
Maintaining Records
After you close your business, keeping records is still a must. This includes business records retention and archiving corporate documents. Keeping detailed records is crucial for staying compliant and legally safe in the future.
Important business papers like articles of incorporation and licenses should be kept forever24. This is also true for benefit payouts and pension or profit-sharing plans25. Some documents, though, only need to be saved for certain periods.
How Long to Keep Business Records
Different records have different timeframes for how long you should keep them. Payroll information, for example, should be stored for three years after you close26. You need to keep employment tax records for at least four years25. Bank and financial statements, on the other hand, should be saved for three to six years26.
Keep property records for three years after you sell or depreciate the property26. The SBA advises holding onto most business files for seven years after shutting down25.
Business tax returns are especially important. It’s wise to save them for about three years after your final return25. In places like California, though, the law can investigate fraud for up to 12 years25. Also, hang onto employment documents like worker’s compensation indefinitely26.
When it’s time to get rid of documents, using a professional shredding service is a smart move26. This step is key to keeping sensitive information safe from the wrong hands.
In short, holding onto business records and archiving corporate documents is essential. These steps ensure your business stays protected and meets legal standards, making the process of closing your business smoother and safer.
Conclusion
Shutting down a business needs a careful and orderly plan. This makes sure you handle all legal and financial tasks right. Start with a clear plan for leaving. Sadly, about 75% of businesses don’t have one. This can lead to problems27. A step-by-step guide helps you do things like telling creditors and ending licenses correctly.
Handling tax responsibilities is key. Make sure to file your last tax returns. Many states want tax clearances before approving your business’s end. This can slow things down28. Also, you must tell creditors and handle claims within 120 days after notifying them28. Taking care of debts and legal stuff avoids future headaches.
When you finally close your business, keeping records for a while is crucial. This carefulness ensures you’ve covered all bases in ending your business. It lets you move on knowing everything is settled. Follow the guide closely. This way, ending your business will be less stressful and more predictable.
Source Links
- How to Close a Business: A Step-by-Step Guide to Dissolving Your Company and Tying Up Loose Ends — Thienel Law – https://www.thienel-law.com/blog/how-to-close-a-business
- How to close a business: A 10-step guide for small business owners – https://quickbooks.intuit.com/r/covid-19/a-10-step-checklist-for-closing-a-business/
- Business Dissolution – How to End Your Business – https://www.wolterskluwer.com/en/expert-insights/business-dissolution-how-to-end-your-business
- How to close an LLC: Dissolution, winding up, and termination – https://www.wolterskluwer.com/en/expert-insights/dissolving-winding-up-and-terminating-a-limited-liability-company
- How to Dissolve a Corporation – https://www.nolo.com/legal-encyclopedia/how-to-dissolve-a-corporation.html
- Removing a Shareholder from a Business or Corporation | Law Offices of David H. Schwartz, INC. – https://www.lodhs.com/blog/removing-a-shareholder-from-a-business-or-corporation/
- Articles of Dissolution – Dissolve A Corporation Or LLC – https://www.corpnet.com/run-business/articles-of-dissolution/
- Articles of dissolution: How to close a company – https://www.legalzoom.com/articles/articles-of-dissolution-how-to-close-a-company
- Articles of Dissolution for Domestic Limited Liability Companies – https://dos.ny.gov/articles-dissolution-domestic-limited-liability-companies-0
- Closing a sole proprietorship | Internal Revenue Service – https://www.irs.gov/newsroom/closing-a-sole-proprietorship
- Closing a partnership | Internal Revenue Service – https://www.irs.gov/newsroom/closing-a-partnership
- Closing a corporation | Internal Revenue Service – https://www.irs.gov/newsroom/closing-a-corporation
- Closing Your Business: Pay Your Taxes and Debts – https://www.nolo.com/legal-encyclopedia/closing-business-what-you-need-30264-2.html
- How to Deal with Small Business Debt – Dealing with Creditors – https://www.debt.org/small-business/how-to-deal-with-debt/
- What Happens to the Debts of a Dissolved Company? | Debt RR – https://www.debt-rr.com/2020/01/24/company-dissolved-debts/
- Letting Employees Go When Your Business Is Closing – https://www.owneractions.com/exit-your-business/close-your-business/tell-employees-business-is-closing/
- Closing a Business – 7 Things to Communicate to Employees – https://thethrivingsmallbusiness.com/how-to-close-a-business/
- Taking Care of Your Employees When Selling Your Business – https://www.linkedin.com/pulse/taking-care-your-employees-when-selling-business-kevin-ramsier
- Basic Business License Maintenance | DC – https://dc.gov/service/basic-business-license-maintenance
- Business licenses & permits FAQ – Avalara – https://www.avalara.com/us/en/learn/guides/small-business-faq/business-licenses-permits-faq.html
- What happens when your business license is revoked? – https://www.wolterskluwer.com/en/expert-insights/can-a-business-license-be-revoked
- 10 tips for managing your small business finances – https://financialsolutionadvisors.com/blog/10-tips-for-managing-your-small-business-finances/
- 10 Tips for Managing Small Business Finances – https://www.businessnewsdaily.com/5954-smb-finance-management-tips.html
- What to Do with Company Records After Your Business Closes Its Doors – https://seamservices.com/blog/what-to-do-with-company-records-after-your-business-closes-its-doors/
- How Long to Keep Business Records After Closing Your Business – https://www.owneractions.com/exit-your-business/close-your-business/recordkeeping-closing-business/
- Keeping Business Records after the Business Has Closed – https://www.theaspteam.com/blog/keeping-business-records-after-the-business-has-closed
- Collision Conclusion: What’s Your Exit Plan Strategy? – https://www.fenderbender.com/articles/article/55055200/collision-conclusion-whats-your-exit-plan-strategy
- Take Action to Properly Dissolve Your Corporation or LLC – https://www.wolterskluwer.com/en/expert-insights/take-action-to-properly-dissolve-your-corporation-or-llc