Key Takeaways

  • Closing a business requires both legal and financial steps to officially dissolve the entity and avoid future liabilities.
  • Business owners must notify stakeholders, pay final taxes, and cancel licenses and permits.
  • Filing dissolution paperwork with the state legally ends a corporation, LLC, or partnership.
  • Liquidating assets and paying debts in proper order protects your credit and reputation.
  • Some states require tax clearance before dissolution; always check with your Secretary of State.
  • Retaining detailed closure documentation helps prevent disputes or audits later.
  • Business owners can find legal help for dissolution and liability issues on UpCounsel.

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.

Finalize Financial and Legal Obligations Before Closing

Before officially closing a business, ensure all financial and legal obligations are fulfilled. This includes paying all outstanding debts, filing final tax returns, and resolving pending contracts. Both federal and state tax agencies should be notified, and all required tax forms—such as IRS Forms 940, 941, 4797, and 8594—should be filed.

You must also:

  • Settle Debts: Prioritize payments to secured creditors first, followed by unsecured creditors and suppliers.
  • Distribute Remaining Assets: After debts are paid, distribute any remaining assets or funds to owners, shareholders, or partners based on ownership agreements or capital accounts.
  • Cancel EIN and Business Accounts: Notify the IRS that your Employer Identification Number (EIN) is no longer in use. Close your business bank accounts and credit lines to prevent future charges.
  • Keep Records: Retain business documents such as tax filings, dissolution forms, contracts, and employee records for at least seven years, as they may be needed for audits or legal verification.

Failing to formally end your business can lead to continued tax obligations, late fees, and unwanted liabilities, even after you’ve stopped operating.

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.

Handling Final Payroll, Sales, and Income Taxes

When closing a business, final taxes must be reported accurately. Employers must withhold and remit final payroll taxes, issue W-2s to employees, and provide 1099s to contractors. Businesses that collect sales tax must file final sales tax returns and remit any outstanding amounts to state authorities.

For federal tax purposes:

  • Corporations should file Form 1120 and indicate that it’s a “final return.”
  • LLCs taxed as partnerships or corporations should file Form 1065 or 1120 as applicable.
  • Sole Proprietors report business income and expenses on Schedule C of their individual Form 1040.

Owners who sold business assets should file Form 4797 for the sale of property and Form 8594 for the sale of business assets as part of a group sale. Additionally, file Form 966 (Corporate Dissolution or Liquidation) if you are dissolving a corporation.

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.

Post-Dissolution Considerations and Liability Protection

Content: After your business is officially dissolved, remain vigilant about potential liabilities. Creditors may still file claims within a specific statutory period, depending on your state’s laws. Maintain insurance coverage until all obligations are resolved to safeguard against post-closure claims.

Other post-dissolution steps include:

  • Notifying Stakeholders: Inform remaining customers, employees, and partners that operations have ceased.
  • Canceling Business Names and Trademarks: File name cancellation forms and terminate any “doing business as” (DBA) registrations.
  • Protecting Your Reputation: Issue a professional closure statement or press release to clarify that the business ended voluntarily and responsibly.
  • Personal Asset Protection: LLCs and corporations should confirm all debts and obligations are satisfied to preserve limited liability protection.

Consulting a business attorney can help ensure that the dissolution process is properly executed and all closure obligations are met, particularly if you operate across multiple states.

Frequently Asked Questions

1. What is the first step in closing a business? You must decide to dissolve the company formally. Corporations, LLCs, and partnerships typically need a vote or written consent from owners before filing dissolution paperwork with the state.

2. Do I need to notify the IRS when closing my business? Yes. You should file final employment, sales, and income tax returns and notify the IRS to close your Employer Identification Number (EIN) account.

3. What happens to unpaid debts after business closure? Creditors can still seek payment. If debts remain unpaid, they may file claims against the business or its owners depending on the structure (e.g., partnerships vs. LLCs).

4. How long should I keep business records after closing? Keep tax and dissolution records for at least seven years, as they may be required for audits or future legal issues.

5. Can I reopen my business later after dissolution? In some states, you can reinstate a dissolved corporation or LLC by filing reinstatement documents and paying any outstanding fees, provided it’s within the allowable reinstatement window.

If you need help with closing your business, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site, from law schools such as Harvard and Yale. Our attorneys average 14 years of legal experience, including work with companies such as Google, Menlo Ventures, and Airbnb.