The reasons to close a business vary. Some entrepreneurs do it out of necessity, knowing that the business has simply run its course. Others may choose to close one business in order to start a new venture and to focus their attention on the new endeavor.
Closing a storefront requires more than simply locking the doors and putting up an “out of business” sign on the door. It’s important to properly file a dissolution and dissolve the business with its state of incorporation.
A dissolution is a formal closure of a business with the state. Businesses may be voluntarily or involuntarily dissolved. A voluntary dissolution, for example, is one where a small business owner chooses to dissolve the business and file articles of dissolution to terminate it. Involuntary dissolutions, on the other hand, may occur to businesses in bad standing with the state. If these businesses do not take action to get back into compliance, the state may dissolve the business, and even decide to shutter it for good.
How do you file for a dissolution? Let’s take a look at what it means to properly dissolve a small business.
1. Reach a formal agreement to close the business
Only a few entrepreneurs, like sole proprietors, may make the decision to close a business on their own. This is because sole proprietors conduct business individually. Businesses that are incorporated under business structures like corporations, for example, would not be able to dissolve the business alone. A meeting would be held with the board of directors that allows each shareholder to vote on deciding whether to dissolve the business.
What happens if you cannot secure the vote? It’s likely that the business will not be dissolved. However, if you are able to reach a majority vote with the corporation’s shareholders, then the business is approved for dissolution. This is also true for other entity formations, like a limited liability company (LLC) and partnership. The members must be able to secure the majority decision to close the business before moving forward with a dissolution.
2. File articles of dissolution
Once you have reached a majority vote to dissolve the business, it is time to complete the filing paperwork. If your business has incorporated as an LLC or corporation, you will need to file articles of dissolution. An application covers the following information:
- Name of the business
- Date dissolution will take effect
- Reason(s) for dissolving the business
- Information on any pending legal actions (if any)
Is your business registered to do business in another state outside of its state of incorporation? If so, you must apply for an application or certificate of withdrawal in these states. This ensures that the business is not held liable for paying future annual reports and state fees.
Corporations must also remember to file Form 966 Corporate Dissolution or Liquidation with the IRS. This document must be filed within 30 days of filing articles of dissolution.
3. Notify and pay employees
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Does your small business employ any employees? If so, you will need to let them know about the decision to dissolve the business. A few next steps to keep in mind for your team members include taking the following actions.
- Paying final wages. If possible, let employees know which date they will receive their final paycheck.
- Making final federal tax deposits and reporting employment taxes. (Use Form 941 or Form 944 for the quarter in which you made the final wage payments.)
- Provide each employee with a Form W-2 for the calendar year in which they were paid their final wages.
- File Form 8027 to report final tip income, if employees receive tips.
4. File a final tax return
Your small business may be closing, but you are not exempt from tax responsibilities. You must file a final tax return and the small business currently owes.
5. Cancel your employer identification number (EIN)
An EIN is a tax ID that the IRS assigns to your business. It allows you to open a business bank account, , and legally identify the business on important paperwork.
The IRS recommends canceling your EIN upon dissolving the business. This must be completed because the EIN is also linked to your IRS business account. Canceling the EIN allows the IRS to close the account.
Additionally, the small business may need to cancel other items associated with the company. These include, but are not limited to, business licenses and permits and any "doing business as" names (DBAs) your business may have.
6. Pay off any outstanding debts
As your business reaches its final stages of dissolution, you must settle any remaining financial obligations associated with the business. This includes business debts as well as liquidating and distributing remaining business assets to members and shareholders.
Once you have completed each item on this list, your business will officially be dissolved. It’s a bittersweet moment, but also one where taking the proper steps helped your small business stay in compliance until the end of its lifespan.
Onward to bigger and better startup ideas!
