by LawInc Staff
August 17, 2016
Closing a business might be necessary for a variety of reasons. Perhaps your business is not making as much money as you had hoped. Perhaps you do not have time to fully dedicate yourself to running it. Perhaps you have decided to change career paths.
Whatever your reason may be, there are several steps that must be taken to ensure your personal assets are protected and you are not exposed to future lawsuits or debts.
When you decide the time is right to close down your business, consider the follow the following steps to ensure you are closing down your business the right way.
Step 1:Get Your Partners’ Consent
Business owners operating as a corporation, Limited Liability Company (LLC) or partnership must typically obtain the approval of other owners to dissolve the entity. Depending on either the protocol established in the organizational documents or various state statutes, business owners must either obtain a majority vote, two-thirds vote or unanimous vote to lawfully dissolve the entity.
You must comply with the voting requirements or a partner can dispute the dissolution as invalid.
Memorialize your business’ decision with either a written consent form or in the minutes and keep a record of it.
Step 2: Dissolve Your Business With the State
Corporations and LLCs must officially dissolve their business with the Secretary of State so they are no longer liable for filing taxes or various other state filings. Also, properly dissolving your business puts your creditors on notice that your business cannot incur anymore debt.
You can find the appropriate forms that must be filed on your state secretary’s site. Corporations and LLCs will generally include information about the business including the disposition of the debts and liabilities, distribution of the assets and how you and other shareholders will dissolve the business.
Some states require you to obtain a tax clearance or consent to dissolution form your state’s tax board before being allowed to formally close down your business. This is to ensure that all business taxes have been paid.
Businesses that originally filed with the state to operate as a partnership must also file a dissolution form with that state.
Step 3: Cancel Permits & Licenses
Any business that is required to obtain a permit or license before doing business should cancel it when deciding to close down their business. Although not required, doing so will avoid any confusion with subsequent businesses that choose to operate using your former business name.
Should you opt out of canceling your permits or licenses, you may make yourself vulnerable to pay taxes and or penalties after you have winded down your business.
Step 4: Put Everyone on Notice
Notify all creditors, customers, suppliers and employees of your plans of going out of business so they have an opportunity to prepare. Your employees may want to find alternative employment and customers will want to find a different service provider or product to replace yours.
Notifying everyone of your plans of closing your business can be good for your reputation as a business owner. Your reputation will precede you when deciding to operate a new business so it is an important tool to keep sacred.
If you have outstanding debts or loans, your creditors will want to know how their balance will be satisfied. If you have provided business collateral, your creditors will want to know if the item is in sellable condition.
Step 5: Pay Taxes
During tax season, be sure to file your final tax returns with the IRS and any appropriate state tax agency. Corporations, LLCs and Partnerships can check a box on their tax return indicating that it is their final return for that entity. Sole proprietorships on the other hand only need to stop filing schedules C & SE on their 1040 Forms.
As for employment taxes, any business that has employees must make their final payroll tax deposit as well as notify both the federal and state tax authorities that they are shutting down their business. By simply checking a box on both the IRS Form 940 (Federal unemployment tax) and the IRS Form 941 (Employer’s federal tax return) you can indicate you will not file any future returns.
Step 6: Pay off Your Debts
If your business owes any money to landlords, suppliers or any other creditors, make sure to either pay them off in full or settle your balance once you have notified them of your plans to close down your business.
Regardless of how you decide to settle your debts, make sure to memorialize your agreement in writing to avoid any complications in the future.
Remember, this is not an exhaustive list of what must be done before closing down your business. Contact an attorney or entity specialist to help you through the process.