The end of an era: What to do when dissolving your business
Even if small business owners know their reasons for dissolving their companies, they may not be as certain about how to go about doing it. For those looking for an advantageous way to move on, here is a checklist of some practical steps.
Sometimes even the best of things must come to an end. You might be looking to retire. Maybe you need to end your company's current operations to facilitate future plans. Small business owners sometimes need to move on from their businesses for these or other reasons. While some may sell or pass down ownership, others choose to dissolve their business.
For other small business owners, the market can simply be a difficult place, and their business doesn’t survive. Money can be a major factor for some companies. There are broad economic factors and individual funding issues. Others businesses struggle to find a solid customer base or establish authority in their field. Unfortunately, according to the Small Business Administration, 20% of start-ups fail in the first year.
However, small business owners dissolving their business not by choice but by necessity should take heart. A 2014 study found that founders with a past failed business are more likely to succeed than first-time founders. Running a business gives entrepreneurs a lot of firsthand insight and experience. It turns out that learning from a first endeavor can provide small business owners an edge when they start their next big idea.
No matter what you plan to do next, the first step is to end your business clearly, concisely, and advantageously. Fortunately, you can follow some basic steps to be sure you can provide proof of closure, alert any necessary channels, and make plans for whatever is on your horizon.
#1 – Be sure this is your final answer.
Sure, it might actually be a pre-step, but it’s an important one. It also may not be as simple as you might think. If your business is a sole proprietorship or single-member LLC, the decision is yours alone. However, things can quickly become a bit more complicated with other business structures.
If you have partners or co-owners with your business, you’ll need everyone to agree. Usually, you'll need to record their decisions in writing. The structure of your business will inform the exact procedure you’ll have to follow. One of the most popular structures for small businesses is a limited liability company or LLC. LLCs are typically comprised of members who can quickly grant approval for dissolving their businesses.
However, you’ll need to follow the procedures that may have been outlined when you first set up your company. Many corporations have bylaws that include procedures for dissolution. LLCs often have operating agreements that detail the process required for approving and dissolving the business. There are usually steps to follow if members or shareholders don’t agree. No matter what, it's usually a good idea to document every member’s approval of the dissolution.
#2 – Formally file.
Once the decision is made and fully agreed upon by everyone involved, the real work begins. It starts with a lot of paperwork and filings. These are vital steps. Skipping these could leave your business open to ongoing financial obligations and growing debt.
If your business is anything other than a sole proprietorship, you’ll probably need to file dissolution documents with any state where your business is registered. Typically, this will be done by filing with the Secretary of State, Business Bureau, or Business Agency in each state.
Check the information for each state to follow the correct procedure. For example, some states require creditors to be notified before you file. Others require you to inform them after the paperwork is processed. All states require you to pay back taxes before filing a Certificate of Dissolution.
When closing a business, the IRS will require you to file certain forms in addition to a tax return. You can file this paperwork alongside your return, but be sure to file the proper forms that correspond to your business structure.
Remember, an LLC is organized under state law. According to the IRS, for federal income tax purposes, it can be considered a “partnership, a corporation or an entity disregarded as separate from its owner.” If your business is an LLC, you should choose the best of these three categories, depending on how your company functions.
- Sole proprietors should file Schedule C - Profit Loss From Business for the year they close their business. Note that if you had any business earnings above $400, you would also need to file Form 1040. If you sold your business, you’d need to file Form 8594.
- Partnerships will file Form 1065 - Return of Partnership Income. On this form, you’ll need to check the box to indicate that this will be the final return. Be sure to include all capital gains and losses. When you file your Schedule K-1, check the box marked “final return.” Depending upon the circumstances of your business closing, you may have to file additional forms. File Form 8594 if you sold your business. File Form 4797 if closing your business reduced the business use of a property to 50% or less.
- Corporations must file Form 966 - Corporate Dissolution or Liquidation. If the circumstances apply, file Form 8594 and Form4797. C corporations must also file Form 1120 - US Corporate Income Tax Return and report capital gains and losses. S corporations must also file Form 1120 and report capital gains and losses. S corporations are also required to complete Schedule K-1 and check the box marked “final return.”
Applicable employment tax forms
If your business has employees, you’ll also need to be sure you’ve paid them all the wages and compensation they’re owed. You'll also need to make the typical withholdings, deposits, and payments for taxes. The IRS will need the following forms
- Form 941 - Employer’s Quarterly Federal Tax Return for the quarter you paid the final wages. (This can also be Form 944 - Employer’s Annual Federal Tax Return.) You must mark the box indicating that this will be the last return. Enter the last payment date on line 17 (or line 14 for Form 944). You’ll also be required to provide contact information for the person maintaining payroll records.
- Form 940 - Employer’s Annual Federal Unemployment (FUTA) Tax Return for the calendar year that final wages were paid. Mark the box to show this is the final return.
| Ending a business can be challenging, but following the right steps can give you a great start to whatever’s next.
#3 - Pay your taxes
Your business may be closing, but your taxes bills could linger. You’ll still have to file and pay the final quarterly estimated taxes owed to the IRS. You’ll also be responsible for your share of payroll and unemployment taxes right up through the last paycheck. Remember, you’ll also have settled any tax debts with state and local agencies. In some states, you’ll need a certificate confirming you’ve paid all tax debts in full before you can file articles of dissolution.
#4 - Send out notifications
If you weren’t already required to notify creditors when you filed dissolution documents, contact them now. Typically, you must notify them by mail, and you must include some important information:
- State that your business has been dissolved or has filed the statement of intent to dissolve.
- Provide the mailing address where creditors can send a claim.
- Indicate the information that must be included in a claim.
- List the deadline for submitting claims (usually, this is 120 days from the date of the notice).
- Remind creditors that claims received after the deadline will be barred.
Some states require you to publicly announce the dissolution of your business. This is so creditors you have forgotten or who are not known to you can make a claim. Check local regulations or consult with an attorney if you’re unsure about what’s required in your area. You will have to settle any claims creditors bring. You'll make agreements with them to pay a settled amount, attempt to reject their claims, or agree to pay what they claim.
If you haven’t already, you’ll need to reach out to your employees and any independent contractors. Inform them that your business is closing. Federal law requires that companies with 100 or more employees provide at least 60 days written notice. Even if your company has fewer than 100 employees, state and local laws could still require advance notice. Contact the labor office in your state to determine the exact regulations that will affect your business.
While closing your business is daunting for you as a business owner, it’s incredibly stressful for your employees. To help, you can provide several means of support. First, expedite payroll, if possible, to provide final paychecks as quickly as possible. Help your employees find alternative means for healthcare coverage as the benefits through your company end. Provide clear instructions for obtaining outstanding reimbursements and accessing or transferring any retirement funds. Finally, assist job searches by furnishing letters of recommendation.
As the process moves forward, communicate practical aspects of the closure to your employees. Cancel healthcare plans, retirement plans, and other benefits. Once the cancelation process is underway, share the process and timelines with your staff. Be sure to collect any business equipment provided to employees, such as computers or cell phones. Ask for any keys to be returned to the office building, but check with your landlord. You may be required to change locks or reset security settings.
Other people who had dealings with your business
List all the people you come in contact with during the course of business. These are also people you’ll want to notify that you’re dissolving your business. Often these people include customers, vendors, suppliers, and landlords. The specific messaging you use will vary somewhat. Customers don’t need all the details. However, you might want to let them know about a final sale or alert them about the last day you’ll be open. Communication with your landlord will probably be more detailed. The two of you will negotiate the terms of exiting the property and review the terms of your lease.
#5 - Tie up loose ends
Take the time to consider all the steps you took when establishing your business. Closing your business is a matter of deconstructing those steps. For example, if you licensed your business or filed a trade name for your business, then you’ll want to contact the licensing authority to have it canceled. As a general rule, you’ll want to cancel all licenses, permits, and registrations filed on your business's behalf.
If your business has an employer identification number (EIN), contact the IRS. The number is permanently attached to your business and won’t be reassigned to another company. However, the IRS can close your business account if you follow the instructions on their website.
Finally, close all business accounts, including credit cards. However, don’t just think of financial institutions when you think of accounts. Remember to consider any subscriptions your business may have to software platforms or trade publications that need to be canceled. Liquidate any remaining assets and divide them among yourself and any partners or fellow owners.
Onward, but don’t forget to keep your records
Whatever the next chapter holds for you, keep records of what you’ve paid and filed to the IRS. You’ll also want to hold on to the documents that your business has been formally dissolved. You never know if you might be called upon to provide proof of that fact.
The entrepreneurial spirit is resilient. Whether you disbanded your business by choice or were forced to close due to unhappy circumstances, there’s a strong possibility you’ll find yourself with another great idea soon. With tools like ComplYant and resources like Make it Easier: Tax and Legal Building Blocks for Entrepreneurs, you can take your next side hustle, lucrative hobby, or ambitious start business plan and set it up for success.