How to Close a Business: Everything You Need to Know
It's important for business owners to understand how to close a business properly to avoid financial and legal trouble.6 min read
How to Close a Business?
It's important for business owners to understand how to close a business properly to avoid financial and legal trouble. Closing a business is a multi-step process that varies state-by-state based on the business structure — corporation, limited liability corporation (LLC), or partnership. Here's what you need to know.
Closing a Business
Retirement, finances, and exhaustion are all common reasons for closing a business. A range of factors come into play, including poor business choices, economic crisis, and limited funding. Regardless of your reason, you'll need to consider a number of issues when doing so, including taxes, finances, and relationships with suppliers, employees, and customers. While most entrepreneurs aren't ready to consider a day when their labor of love will be ending, the odds don't favor small businesses. According to the U.S. Small Business Administration (SBA), 2009 saw 552,600 new companies open and 660,900 businesses close. In the restaurant industry, the statistics are even more dire. The National Restaurant Association reports that only 60 percent of new restaurants remain open after the first year and only 30 percent after the third year.
Closing a business often takes months to properly resolve the situation and tie up loose ends. You'll need to develop a plan to close your business that will protect your assets and credit as well as maintain your good name in the community you serve. In the process, you'll also be protecting others involved in the business, including investors, co-signers, lenders, and even your spouse and other family members.
Closing your business without taking the steps to do so properly can cause headaches for years to come in the form of debts and lawsuits. Instead, you'll need to clearly notify stakeholders, including both customers and creditors, of your plans to dissolve the business. Doing so will help prevent lawsuits. Terminating an LLC properly can help you avoid fees and fines associated with the end of your business.
To maximize the last few weeks in business, notify stakeholders in a strategic order. This is dependent on whether you'll be keeping employees on, continue to sell inventory, and buy additional supplies.
Checklist for Closing a Business
If your business is closing, you'll want to get rid of as much inventory as possible. One way to do this is by holding a "going out of business" clearance event.
Notify creditors promptly, which limits the time period in which they can attempt to collect outstanding debt. This list includes your utility companies, providers of services, lenders, and other suppliers.
Notify customers and close out existing contracts by returning payments or deposits for services or goods you will be unable to render.
End your commercial lease following the terms of the lease; in most cases, you'll need to provide the landlord with at least 30 days' notice.
Give employees as much notice as possible and pay them money owed. Some states require that employees be paid the balance of accrued vacation time upon business closure.
Consider offering an employee in your finance department a bonus to stay on and tie up loose ends.
Liquidate assets and pay as many debts as possible, in priority order. In most cases, this includes the landlord, bank or lenders, supply companies, utility companies, and providers of service. Ask each creditor for a letter indicating that the balance of your debt is fully paid.
- Make final deposits to federal and state payroll systems.
- Submit final funds and sales tax forms
- Cancel subscriptions and business credit cards.
- Close all accounts.
- Cancel permits and licenses through your state and county.
This includes your business license, business name, and seller's permit.
File final tax returns, including state tax reporting and wage forms as well as IRS Forms 940 and 941 and final income tax return. You'll also need to file IRS Form 4797 if you sold business assets (or Form 8594 if most of these assets were sold to one person.
Educate yourself about bulk sales laws, which may require you to notify credits in a certain number of days as well as post notice in a newspaper. Consider selling remaining inventory online on Amazon or eBay. An inventory liquidation company such as Genco or Excess Technologies may purchase the inventory directly.
Provide former employees, colleagues, and other business contacts with your new contact information.
To dissolve an LLC, corporation, or partnership, the business owner must file a certificate of dissolution and other required forms.
Your collection strategy for outstanding assets should be aggressive. For example, offer discounts for immediate payment. Increase the percentage as the closing date approaches. Personally, call and email creditors to ask for payment rather than relying on a collections letter.
Consider selling assets that haven't been paid for a percentage of the invoice.
Larger businesses should consider issuing a press release.
If you have a business contract that has a fee for early cancellation, pay the fee if possible to prevent a lawsuit.
Notify unsecured suppliers and creditors after you close your doors and request your last bill. Keep in mind that when you tell your bank you are closing, it can deduct the loan balance directly from your business account.
Depending on your state, creditors who are unpaid can file a claim with a certain amount of time. Follow state rules about creditor notification letters for corporations and LLC. The letter should include information about the state statute of limitations and note the date when this period will expire. This information can be found in your state's Limited Liability Company Act or the Business Corporation Act. Statelocalgov.net may be a helpful resource
IRS Form 656, Offer in Compromise, can be filed to request a reduction in the amount you owe creditors. However, if you plan to file for bankruptcy, this avenue is not available. IRS Form 433-A allows you to request a debt installment plan.
Issue W-2s to employees and then report the withholdings to the IRS on Form W-3. Independent contractors should be offered 1099-MISC forms.
If you are a sole business owner, you'll receive any proceeds left over after creditors are paid. For LLCs or partnerships, each business owner receives an amount equal to the balance of their capital account. In corporations, excess cash is divided among shareholders based on the number of shares they own.
Closing the Business as Required by Business Articles
This information is not applicable for sole proprietorships. For general partnerships without written partnership agreements, let your partner know in writing that you'll be withdrawing from the business. If there is a written partnership agreement, as with an LLC, you'll need to follow rules of dissolution. These may be spelled out in the partnership agreement or articles of incorporation. If not, consult state laws. The common standard is to require either a majority or two-thirds vote to dissolve the business.
Archive operating documents with the secretary of your state. Closely following these rules can prevent later disagreements.
Filing with the State
Dissolution papers must be filed with the state for limited and general partnerships. This does not apply to sole proprietorships. This process varies among states, but is usually called a Certificate of Dissolution or Articles of Dissolution. In some states, you have to file these papers prior to letting creditors know that you're closing. In some states, you'll need to bring your taxes current before filing, a policy known as tax clearance.
If your state doesn't require paperwork to be filed, you may still want to do so as this places creditors on notice that you cannot incur additional debt. For example, if you want to end the partnership and your partner does not, filing papers prevents them from running up further debt in the name of your business.
Notify the IRS and State and Local Tax Agencies
Your business is still required to pay taxes for last year and the current year, which means you'll still need to report payroll and make deductions; file taxes; and submit capital gains and liquidation forms. It is especially important to the IRS that you pay all outstanding payroll taxes before closing. When preparing to close your business, consult the business closing checklist prepared by the IRS. This includes all required forms.
Filing for Bankruptcy
If you choose to file for bankruptcy, you'll need to do so before taking the steps listed above to close your business. You should consult an attorney who specializes in bankruptcy and business closings to determine whether bankruptcy is the right choice for you and guide you through the process. An attorney can also help you cope with ramifications related to creditors and alert you to potential liabilities. An accountant or tax attorney is also a valuable resource. He or she can help you understand the tax consequences of the decisions you make when closing your business.
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