When to close a business is not an easy decision to make and can be based on a number of factors – financial, retirement or starting a new venture. Closing your business is not as simple as turning off the lights and locking the door behind you. The process can take months. Failing to properly close a business can have long-term ramifications.
Closing a business is a multi-step process that varies state-by-state based on the business structure – corporation, limited liability corporation (LLC) or partnership. There are general guidelines to follow, however, for how to close a business. Having a checklist ensures the process goes smoothly and lets you walk away from your business free and clear.
Take a Vote
While you can simply cease operations, the state continues to recognize the business as an ongoing entity until it is formally dissolved and you will be liable for filing annual reports and paying fees and taxes. All members must vote to close the business. Record the vote and keep this with the business records.
Dissolving a Corporation
Call a meeting of the board of directors and vote to formally dissolve a corporation as set out in the corporate bylaws or articles of incorporation. As a rule, it requires a majority, or two-thirds, vote to dissolve a corporation. In some instances, a unanimous vote may be required.
Dissolving an LLC
A formal vote by members of an LLC on a dissolution resolution is required to dissolve an LLC. Follow the procedures set out in the operating agreement. Some agreements may require a simple majority vote, while others require a two-thirds majority vote. A few may require a unanimous vote.
Dissolving a Partnership
Partnerships don’t have to have a partnership agreement; however, it is advisable to have one on file to protect the partners. In lieu of a formal partnership agreement, it’s fairly easy to dissolve a partnership and requires one partner to simply give written notice to the other that they are leaving. If you have a partnership agreement, make sure it sets out dissolution procedures.
Note: If the business doesn’t have a dissolution plan in place, follow the procedures set out in your state’s business statutes.
The closing business needs to send creditors a written notice that the business is closing and give them a deadline to submit claims by. In some states, you must do this before filing articles of dissolution. As a rule, creditors have between 90 and 180 days after the date of the notice to submit a claim; the exact deadline is established by state law. Let creditors know that claims submitted after the deadline are barred.
To reduce the risk of an unknown creditor stepping forward and filing a claim against the business, you may want to publish a notice of dissolution in the newspaper. The notice should include a section stating that claims will be barred unless legal proceedings are started within a designated time period, and include a mailing address. In most states, unknown creditors have two years to file a claim; in others, five.
Like a corporation or LLC, a partnership needs to send creditors written notice that the partnership is dissolving. However, creditors can still sue you to recover an outstanding debt after the partnership dissolves. A creditor must file a lawsuit within three to 10 years, as set out in your state’s statute of limitations.
Pay Outstanding Taxes
Make sure to notify the Internal Revenue Service (IRS) that your business is closing and take care of any outstanding taxes. If you have employees, make your final payroll tax deposits and file your final federal and state employment tax returns. You and your co-owners can be held personally liable for unpaid payroll taxes.
Once all outstanding taxes are paid, have the IRS issue a “consent to dissolution” or a “tax clearance” document. This document is often required before you can file articles of dissolution.
File Articles of Dissolution
Articles of dissolution formally dissolve the business and places creditors on notice that the business can no longer incur debts. The paperwork must be filed with the secretary of state or business filing agency in the state where you do business.
If a partnership has a partnership agreement on file, it may need to file a dissolution form with the state where it does business. The process from filing a statement of dissolution to dissolving the partnership may take up to 90 days and, once complete, renders your partnership agreement null and void. This ensures no partner continues to incur debts on behalf of the partnership
Note: If you registered under an assumed name, you will also need to cancel that registration.
Negotiate With Creditors
Closing a business isn’t an easy way out of debt: a corporation or LLC must settle its debts before it can distribute the remaining monies to the business owners. After all the creditors have been paid, close the business bank account and cancel the credit cards. If the business can’t pay off all its debts, arrange a settlement with creditors or file bankruptcy.
If a partnership cannot afford to pay its debts, each partner is personally responsible for paying off the remaining debt and creditors can come after your personal assets. Once the accounts are settled, distribute the remaining assets per your partnership agreement and close the business bank account and credit cards.
File Final Tax Returns
File the annual federal and state tax returns for the year you go out of business and check the box marked “final return.” You will also need to notify the IRS to close your employer identification number account.
Complete Final Paperwork
Make sure to cancel all business licenses and permits and contact your insurance broker to cancel your business liability and workman's compensation insurance policies and notify your employee-based health care provider. Finally, make arrangements for someone to store the business records. Business records should be kept for three to seven years.
A business closing doesn’t have to be a painful process if you follow a checklist. Because rules vary from state-to-state, it’s best to consult with a business attorney to make sure you meet your legal obligations. Failing to close your business down properly leaves you financially and legally liable long after the business is shuttered.