Legal Steps to Closing a Business Before the New Year

by Nellie Akalp

Did your business struggle this past year? You’re not alone. Statistics show 20% of small businesses fail in their first year, while 30% fail in year two, 50% fail after five years in business, and 70% don’t make it past their 10th year in business. Business failure does not mean the end of your entrepreneurial dreams. However, before you move on to your next great idea, it’s important to follow the right steps to legally close your business. 

Closing a business legally is just as vital as starting one legally. If you don’t do it correctly, you could get in trouble with the federal and state governments, putting your business reputation and credit health on the line. Even if you’ve already closed down the business, you need to make sure you’ve processed the correct paperwork and paid any outstanding fees—by year-end, if possible. 

Why? In the eyes of the government and the IRS, if you don’t follow the proper steps of business closure, you are still responsible for filing annual reports, filing state/federal tax returns, and maintaining miscellaneous business licenses and filings. You are also responsible for any fees associated with the inactive business. If you don’t pay those (perhaps because you think you no longer have to), it could lead to a bad credit score, which will only hurt you when it’s time to secure financing for your next business. Here are five steps to closing your business.

Step 1: Make a Unanimous Decision

If you’re a sole proprietor, the decision to close down a business is all yours. However, if you have any partners (even silent ones), own a corporation or LLC, you must get all co-owners and board members to agree to the business closure. The method for closing your business should be outlined in your operating agreement/articles of incorporation. Usually, the process requires there to be a formal vote to close the business, signatures collected, and documentation made in the company’s meeting minutes. 

If the business is a corporation and you’ve issued shares, you need two-thirds of those with voting shares to agree on closure. If there are no shares issued, the board’s approval to close is enough. If the business is an LLC, the rules vary from state to state, so check your state’s requirements.

Step 2: File Paperwork

After the official vote for dissolution, you must file the appropriate forms with the Secretary of State’s office in the state your business was formed. These forms are called “Articles of Dissolution,” “Certificates of Termination” or “Certificate of Dissolution.” If you don’t complete this step, you are still obligated to file the required annual paperwork and pay the fees associated with the business. 

It’s also important to cancel any city registrations, permits, licenses, and business names. When you file the dissolution paperwork with your state office, the business name is automatically canceled. However, if you’ve registered a fictitious business name (DBA) with the state, you may need to file a separate cancellation notice on the DBA. Canceling a trademark is a bit more complicated, but can be done through the United States Patent & Trademark Office (USPTO) or by using a third-party company to do if for you. 

Step 3: Settle Your Debts

You are also responsible for settling all the company’s financial obligations such as paying vendors, employees, etc. Creditors have first rights to any residual assets and if you, as the business owner, pocket any money before paying creditors, you can be personally sued for the money. If you don’t have the money to pay off all the debt, you may have to file for bankruptcy and let the courts settle the assets. Likewise, LLCs and corporations are required to pay off creditors before any money or assets are distributed to shareholders, although personal assets are off-limits to creditors.

Step 4: Cancel Your Business with the IRS

You cannot cancel your IRS-assigned Employer Identification Number (EIN)/Tax ID once your business has started operating. The number is forever and permanently linked to your business whether it is open or not. (If you were assigned a number, but never used it, you can write to the IRS and have it canceled.) If the business is a corporation, you should file Form 966, Corporate Dissolution or Liquidation.

Step 5: File a Tax Return

Don’t wait for tax season to file your last tax return. File the final wage reports, report any capital gains and losses, submit employment tax returns, and be sure to check the box labeled “final return” on the forms so the IRS knows this is the final return and your business is no longer operational. 

Read more great posts from Nellie Akalp here.