After years of investing time, money and energy into your dream, it’s no surprise that closing a business is one of the hardest things to do. Not only is it stressful and emotionally devastating, but dissolving a business without taking the proper steps can be costly if not done properly.
For example, some states require you to pay a franchise tax, which will continue to accrue until the business is formerly dissolved. Also, you could also be penalized for not filing taxes, which are required as long as your business is active.
There are many reasons why people shut down their businesses. If you need to dissolve your business, make sure you do it right by following these 6 simple steps.
Step 1: Formally agree to close the business
Before dissolving a corporation, you’ll need to hold a meeting of the Board of Directors and take an official vote. The minutes of the meeting should be recorded and kept as part of your corporate records. If the vote passes, then the dissolution must also be approved by a majority of the shareholders.
If you cannot secure that vote, you will probably not be able to dissolve the business. Now, lawsuits can be filed to force dissolution, but these suits are rarely in the best interest of the directors, executives, or managing members. So when you start the dissolution process, make sure you can secure enough votes to get past this first hurdle.
In addition to holding a shareholder vote, public corporations are required by most states to formally announce their intent to dissolve in a dissolution proposal. This proposal will usually name the corporation and have to have a statement confirming that the proposal was adopted by a majority vote. This proposal will also be made part of the public record.
All corporations must also file form 966 with the IRS within 30 days of filing their articles of dissolution. Some states will require corporations operating within their borders to have a tax clearance certificate before the dissolution is completed.
Each state has different requirements for what that majority must be. Check with the Secretary of State if you are unsure.
In the case of a partnership or LLC, the owners must approve the decision to close. Hold a meeting of the members and have a formal vote. Also remember to document the dissolution process with a written agreement.
Refer back to your corporate bylaws which often outlines the dissolution process. The directors of the corporation or members of an LLC usually vote on the details of the dissolution at the time of incorporation.
This process does not apply to sole proprietors because they do business individually. They are solely responsible for their dissolution, liabilities, resources and debts.
Step 2: File the articles of dissolution
State requirements on what the articles of dissolution have to include vary, but for the most part the information is fairly standard. The corporation or LLC will have to provide its name, the date the dissolution will take effect, the reason for dissolution, and information on any legal actions pending, if any are. If your business is registered to do business in any other state, it must also file an ‘application of withdrawal’ or ‘certificate of termination’ with those states. Otherwise it could be held liable for future annual reports and state fees, even though the business no longer exists.
Step 3: Complete the IRS checklist
The IRS website provides a business closing checklist, with all of forms and links to additional state and local requirements. Start by filing an annual return, final employment tax return, and proof of payroll records. Pay all taxes owed and remember to keep up with state tax deadlines to avoid any fees. Also, its a good idea to keep copies of all forms filed for your records.
Step 4: Cancel all business licenses
Cancel your business licenses and permits with the agencies that issued them. Don’t forget about your seller’s permit, tax registrations or any other industry specific permits.
If you filed a DBA for your business, you’ll need to file an “abandonment of fictitious business name”. Depending on what the state requires, you may have to write a letter or fill out a form to finalize the process. Contact your Secretary of State for more details about the process or any forms you might need.
Step 5: Notify and pay your employees
When you close a business, you need to notify all employees as soon as possible. Let your employees know that they will receive their final paycheck on their last day. Check state laws on final paychecks and calculate employee salaries and hourly paychecks. Also, make sure to account for each employee’s W-4 state and federal withholds. Then, total the appropriate amount for withholding and then distribute them into the correct accounts.
Step 6: Pay off any remaining business debts
After paying taxes, pay employee’s final checks and creditors. If you can’t pay your creditors, meet with them to determine a settlement. All financial obligations must be paid for. If you can’t pay off your debts, you’ll need to file for bankruptcy or find other ways to acquire funds.
Finally, owners will need to liquidate and distribute the remaining businesses assets to shareholders and members based on their percentage of ownership.
In other words, corporations pay their shareholders based on how many shares they own, and the shareholders return their outstanding shares. In LLCs, assets are distributed according to how much each member/manager originally contributed. Don’t forget to report these distributions to the IRS.
That’s it! Make sure to follow these steps when you close your business to avoid any surprises.