How To Close a Small Business: Everything You Need To Know
Knowing how to close a small business properly will prevent you from being surprised with future fines, obligations, and debts.3 min read
2. Notify Employees
3. Notify Clients
4. Inventory and Sell Assets
5. Resolve Creditor Claims
6. Cancel Business Licenses
7. File Dissolution Forms
8. File Final Tax Returns
Knowing how to close a small business properly will prevent you from being surprised with future fines, obligations, and debts. This multi-step process varies depending on the laws in the state where your business was established. Simply walking away from the business without fulfilling these guidelines can have serious financial and legal ramifications. It's important to consult with an attorney who is knowledgeable about state laws when closing your business.
Agree To Close the Business
If you share a business with other owners and have formed a partnership, corporation, or limited liability company (LLC), you'll need to meet with them and formally agree to dissolve. This should be documented in a written agreement. Follow the guidelines established in your articles of incorporation or corporate bylaws. In most cases, a two-thirds majority will be required, though some businesses require unanimous agreement to dissolve a company.
If you have a partnership, follow the notification requirements established in the partnership agreement. If none exists, you should give the other partner adequate notice in writing that you plan to close the business.
Your state may have laws about the timeframe in which your employees must be informed of the business closing. Consult your attorney before making this announcement. You should not let your workers be the last to know the business is closing. Instead, tell them honestly about the reasons for the closure without revealing confidential information and give them time to seek new employment. Provide letters of recommendation when requested and appropriate. Consult your state laws about final paychecks. You may need to pay out unused leave or collected payroll tax.
As for clients, let them know with a personal note. Accommodate any final outstanding orders. You should also close out your vendor and supplier accounts once these orders have been filled. Paying these accounts in full will preserve your good business reputation, which is especially important if you want to start a new business in the future.
Inventory and Sell Assets
If your business retains assets, selling these items can provide funds to settle your final accounts and recover business losses. These assets must also be reported to the IRS on Form 8594.
Resolve Creditor Claims
You are required to provide written notice to your creditors that your business is closing, including a deadline by which they may submit claims. In most states, they must be given between 90 and 180 days to submit claims. Indicate that claims are barred if submitted past the deadline. Some states require this step to be taken before the articles of dissolution are filed.
You may also want to publish a notice of dissolution in your local newspaper to prevent being surprised by future creditor claims. This should include a mailing address for claims. The statute of limitations for claims by unknown creditors is two years in most states.
Like LLCs and corporations, partnerships must also send written notice to creditors when a partnership is dissolving. However, partners can be sued to recover unpaid debt for up to 10 years, unlike business entities that provide limited liability.
Cancel Business Licenses
Some types of business are licensed by the federal, state, county, and/or municipal government. Contact the authority that issued each of your business licenses to cancel it. You should also cancel any existing workman's compensation or business liability policies.
File Dissolution Forms
Most states require you to complete a dissolution form depending on the type of business entity. This releases you from liability for future business filings and annual tax payments.
File Final Tax Returns
- Even if you were only in business for part of the year, you still need to file an annual tax return for the final year in which your company operated.
- Check the box on your tax forms that indicates a final tax return.
- You must also contact the IRS to cancel your employer identification number (EIN).
- Your state will have its own laws about filing final tax returns.
- If you have employees, you must file a final employment tax return and make a final federal tax deposit.
- Keep copies of your final tax filings for your records.
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