Has your business reached the end of the line? Then there are things to consider when going through the dissolution process. Why would a business close? Well, there are many reasons, like retirement, a lack of passion, or financial issues.
Regardless of why, this article will give you insight into what you must do. The business dissolution process is not easy, but we can help. It’s possible to walk away from an LLC or corporation, but you must follow the correct steps.
What does it mean to dissolve a company?
Dissolving a company means officially and legally closing a corporate entity. Ceasing business operations is just one small part of the process. There’s more to dissolution than closing the doors and saying goodbye to customers.
Many factors can cause business dissolution:
- Bankruptcy
- Legal issues
- Voluntary dissolution by the owners
- Failure to file annual reports or pay taxes and fees in the state of incorporation
So what are the steps involved in dissolving a business? This blog post will discuss the steps involved, but know that the exact steps will vary depending on your business type. Every corporation must deal with assets and liabilities properly. You’ll also file necessary documents with your state and the federal government. Your priority is to file an Articles of Dissolution.
The more owners, assets, and shareholders a business has, the more complex dissolving it becomes. All involved parties in a company should approve. Approval may involve a vote by the board of directors, shareholders, and minority partners.
What happens if you don’t dissolve your business?
Many people wonder what happens to an LLC or other business type after closing. Officially dissolving your business is the only way to end your obligations. Your state government, the federal government, reporting agencies, and debtors all need to know. Late fees and penalties will accumulate if your business is still legally active.
- Reporting: Until you officially dissolve your business, it must comply with all state reporting requirements. Most states require companies to file an annual report and pay an annual tax or fee. A defunct business is still responsible for annual filings unless it files Articles of Dissolution. Penalties for failure to report are steep.
- Taxes: Active businesses must file corporate tax returns at the state and federal levels. This is true even if the business is no longer in service during the dissolution year. Interest and penalties due to not filing tax returns are costly. The same is true if you don't file Articles of Dissolution.
- Liability: Continued liability is the last significant risk. Until the owner/s dissolve the company, it is still liable for its past actions. Third parties can continue to take legal action against a corporation that’s still active.
Closing your business in 8 steps
Ok, now you know what it means to dissolve a business and why it’s in your best interest if it isn’t in service. Let’s discuss the steps you should take to close down a business legally.
#1 - Receive consent from all involved parties
The complexity of this step depends on your business structure. Sole proprietors and single-member LLCs can decide independently since they are the only owners. Any partnership, corporation, or LLC with multiple members will require multiple approvals.
#2 - File dissolution documents
You can move onto this step if your business has ownership and shareholder approval. Next, file Articles of Dissolution with the Secretary of State’s office. You have to do this in the same state where the business was incorporated. You'll do the same if your business is qualified to transact in other states. The next step on our list is to notify creditors and resolve any pending claims. Know that some states require businesses to do this before filing for dissolution.
Contact your Secretary of State’s office to get exact details.
#3 - Resolve financial obligations
You need to do one more thing before you consider your company’s financial obligations settled. You legally must notify any entity that may be interested in your company. This notice includes creditors, shareholders, customers, service providers, employees, and the IRS. Again, laws stating which parties you must notify will differ by state. Notifying the IRS is a universal requirement across the United States.
The next step is settling outstanding liabilities that the business has incurred. These may include goods, services, loans, debts, and payroll. After receiving notice, creditors will have a finite amount of time to ask for debt payments.
#4 - Cancel everything
Recurring expenses, licenses, and intellectual property will grow throughout a business's lifetime. When dissolving a business, you’ll want to cancel all recurring costs:
- Utilities
- Software
- Accounts with vendors
- Rent
Canceling licenses, registrations, and permits will protect your reputation and finances. Contact the agencies that issued the licenses and permits for the business.
Note: Just because we list these steps in a specific order does not mean you need to follow them as such. For example, you won’t cancel your business bank account immediately. First, you need to liquidate company assets, file your final tax return, pay employees, and distribute the remaining assets.
#5 - Liquidate company assets
Any property and assets your business owns not used as collateral for loans will be liquidated. Not all companies can liquidate assets if the amount of cash on hand plus liquid assets amount to less than the total money owed.
#6 - File final tax returns
Businesses must file a final federal and state tax return for the year they closed business. They’re also responsible for formalizing the business closing with the IRS and your state tax agency. You must file employment tax returns if your business hired full or part-time employees.
Consult with your tax professional and review this IRS checklist to know what steps to take for your specific business type.
Report Payments To Contract Workers
Has your business paid any contractors at least $600 for their services (including parts and materials) during the calendar year? Then you must report those payments to the IRS.
#7 - Take care of your employees
Out of respect, give your employees as much notice as possible. Do you need your employees to help wind up the business? Offer them a bonus or severance to stay until the business officially closes. You’ll have to pay your employees their final wages and compensation owed on their last day.
#8 - Distribute remaining assets
Many incorrectly believe this last step is the first and only step in business dissolution. However, this step is only appropriate after paying remaining claims, employees, and financial obligations. Then, you can distribute the remaining assets to the owners and shareholders. If you're the only owner, then what remains is all yours. Know that this isn't tax-free, and you must report distributions to the IRS.
Canceling your EIN
A common misconception about EINs is that you can cancel or close them. The IRS cannot cancel it since your assigned EIN is a permanent number. This rule applies even after business dissolution. The IRS will never assign your EIN to another business entity. It will belong to your business should the need to reinstate your business.
To “cancel” your EIN, you need to close your business account with the IRS by sending a letter that includes the following:
- The complete legal name of the business
- The business EIN
- The business address
- The reason you wish to close the account
- A copy of your CP 575, the notice the IRS sent you when they assigned your EIN.
ComplYant is here to help at every stage of your business
The thought of dissolving your business isn’t pleasant. If your business reaches that point, you should have a plan. Follow these steps to conclude the dissolution process as quickly as possible and without skipping any steps.
ComplYant has helpful resources like the Tax & Legal Building Blocks for Entrepreneurs webinar. With our help, you can be ready for any business hurdles on the horizon.

Related posts

Someone wants to invest in your business: The A-Z guide

Customer experience: What it is and how to win customers over
