How To Close a Sole Trader Business?
If you need to know how to close a sole trader business, check out this step-by-step guide to help you get started.3 min read
2. Steps To Follow
3. Notifying Vendors and Creditors
4. Notifying Employees
5. Filing Final Taxes
If you need to know how to close a sole trader business, you need to follow the guidelines established by your state. This step-by-step guide can help you get started.
About Sole Proprietorships
A business owned by just one person is called a sole proprietorship. If you run this type of business, you have the sole legal responsibility for all business debts and obligations. You're also responsible for taking the right steps to terminate the business. Because your personal finances are at risk if you have outstanding debts, it's important to follow the correct procedures to end your sole proprietorship.
Most states do not require sole proprietorships to file official registration paperwork as long as business is done under his or her own name. In a few states, however, solo business owners must have a general business license, which is issued by the secretary of state's office.
Steps To Follow
- Get in touch with the Small Business Administration office in your area. They can provide information about the paperwork required to close your sole trader business. In most cases, you'll have to cancel your business licenses and permits and inform state, local, and federal tax authorities.
- If you have employees, let them know about your plans to close. Post information about your plan to close and the effective date on your business website. Remove any online order forms and fulfill all outstanding orders.
- Many sole proprietors operate the business under a name other than their legal name, known as a "doing business as" or DBA. You'll likely need to take steps to deregister the DBA name.
- If you rent a business or office space, let your landlord know you'll be vacating per the terms of your lease. Pay off your final bills. Let your creditors and debtors know that your business is closing, including payroll, insurance, and utility companies as well as other service providers.
- Cancel your business credit lines and bank accounts. Pay outstanding sales and employment taxes.
- Cancel your sales tax ID number if applicable. Keep in mind that this cannot be done until outstanding sales taxes are paid. When you cancel the number, you can also apply for refunds for which you may be eligible.
- Once all taxes and creditor claims have been paid, liquidate all remaining business assets.
- Report income earned during the liquidation process as well as capital gains and losses on your final tax return.
- Keep careful track of all your closing actions. When the tax year ends, file the final tax return for your business.
Notifying Vendors and Creditors
You should let creditors and vendors know about your decision to terminate the business in writing. Indicate the plans for paying your final debts, finishing projects, and fulfilling contracts. The notification should include the final date you plan to operate your business, the final service date, and a copy of your agreement or contract with the individual or business.
If your client or vendor contract indicates, you may want to ask them to sign off on the letter to avoid breach of contract claims down the road.
If your business has employees, you need to let them know about your decision to close the business. The Worker Adjustment and Retraining Notification Act requires a 60-day written notice if you have at least 100 employees who work 20 or more hours each week. You'll need to issue final paychecks and file final employment taxes.
Filing Final Taxes
If you had income or expenses during the final tax year, you'll need to file a Schedule C. This is not required if your business was not active during the tax year in question. This means it had no income or expenses during the tax year. You do not need to let the IRS know that your sole proprietorship is closing. Simply fill out your Schedule C just as you would otherwise.
Your final quarterly federal withholding tax report, Form 941, will be used to calculate final Social Security, income tax, and Medicare taxes. For this final 941, complete Part 3 of the form, which is found on page 2. Write the date that final wages are paid and check the box to indicate that this is your final form.
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