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8 important steps to close a business before the end of the year

8 important steps to close your business before the end of the year

grabber admin by grabber admin
November 3, 2022
in BUSINESS
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8 important steps to close a business before the end of the year

8 important steps to close a business before the end of the year

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Entrepreneurs have faced more challenges in recent years, and 2022 is no exception as inflation rises and consumer spending declines. Unfortunately, some entrepreneurs have decided to close their business due to economic difficulties. Others may wish to stop trading for other reasons such as retirement. Regardless of why someone decides to close their business, it is important to understand that there is more to it than just stopping the sale of goods and services. There are additional requirements for the legal dissolution of a company.

What a business owner should do depends on the type of business structure (e.g. sole proprietorship, partnership, limited liability company, C corporation), where the business is located, whether it has employees, and other factors. As you can imagine, legal and financial issues need to be resolved, so guiding a trustworthy and reputable lawyer, accountant, and tax advisor can help ensure that operations run smoothly and no important tasks are missed.

The following is a summary of the tasks that may arise when closing a deal. If the goal is to get everything in order by the end of the calendar year, business owners will need to get their affairs in order as early as possible.

8-Point Checklist for Business Liquidation

1. Check the organization’s governance documents to know the procedures to follow
Different business structures have different internal governance documents containing provisions for the conduct of the company’s affairs. One situation they often turn to is what happens when a company breaks up.

For example, a corporation’s articles of association may require organizers to hold a meeting, take a formal shareholder vote, and obtain the approval of a specified majority of shareholders.

Internal agreements of legal entities, such as articles of association, partnership agreements, and operating agreements of limited liability companies, usually specify in detail what must happen in order to approve the dissolution of a business.

2. Make sure the business entity is in good standing
The business must be in good standing, meet all of its current compliance obligations (such as filing and paying taxes, filing annual returns, maintaining a registered agent, renewing licenses, etc.) before dissolving or de-stating a legal entity.

If a business has lost its good reputation, it must do whatever the state requires to restore it before it can be dissolved. This may include paying taxes, filing certain reports, claiming restitution, or other actions.

3. File dissolution documents
LLCs and corporations must file papers of dissolution (called a certificate of dissolution or certificate of dissolution in some states) to officially liquidate a business in the state.

The legal trade name of an LLC or corporation (the one listed in its Articles of Association or Articles of Association) will be automatically canceled when the dissolution takes effect. Any business (including sole proprietorship and partnerships) that has used a fictitious business name (DBA) must have the name canceled by the state or local authority that approved it.

When an entity is foreign qualified to do business in states other than its home state, it must also notify those states that it will cease operations in those countries. Required procedures and documents may vary by state; This usually involves filing a withdrawal request and paying the appropriate filing fee.

4. Notify external stakeholders
It is considered good manners, and sometimes required by law, for a business to notify creditors, vendors, and customers that it is going out of business. Some states require business entities to publish a notice in a newspaper or other publication of their dissolution. This helps ensure that anyone who is owed money or who has pending transactions with the business is aware of its closure.

5. Prepare final tax returns and close tax accounts.
Most businesses will have to deal with tax issues at the federal, state, and local levels. The rules and processes for concluding final tax liabilities vary by jurisdiction. A business (and/or its owners) may continue to be liable for federal, state, and local income and employment tax liabilities until they close their federal, state, and local tax accounts.

Here is some general information about what businesses should usually do before closing their tax accounts. However, as things can get complicated, business owners are advised to seek advice from their accountants or tax advisors.

Payroll tax and other tax liabilities related to employment. Any business with employees that makes payroll tax payments and contributions to State Unemployment Insurance (SUI or SUTA) and State Income Tax (SIT) must file its final payroll forms and pay payroll taxes after payment of final payments to their employees.

At the federal level, the employer must make final federal tax deposits and report payroll taxes (including federal income tax, FICA, and FUTA withholding). In addition, the company must provide each employee with a Form W-2, Payroll and Tax Statement, showing wages and salaries for the year. If a company paid $600 or more to independent contractors in the past year, it must also issue Form 1099-NEC, Non-Working Compensation, to those individuals.

Depending on the type of legal entity and other factors, business owners may also need to complete other forms and documents.

Sales tax. Businesses that have collected sales tax on products and services must file their final tax forms and payments with state (or local) tax authorities.

Income tax. Businesses must file their final income tax returns and make all payments due. The IRS lists the requirements and forms to use for each type of organization:

private entrepreneurs
associations
Corporations
To cancel a business EIN (employer identification number) and close their IRS business account, owners must send a letter to the IRS that includes:

Full legal name of the company
TIN
Business direction

Why is the account closed?
6. Revoke business licenses and permits
Many businesses require one or more licenses and permits to operate legally in their state or local jurisdiction. Business owners must inform each licensing agency of the liquidation of the business and require the revocation of licenses and permits.

7. Sort out assets and debts

A business may have physical assets (furniture, property, office equipment, etc.) and inventory that it can sell to generate cash before closing its operations. It may also have intangible assets (e.g., patents, trademarks, copyrights, customer lists) that can bring in some funds.

Those monies could come in handy for paying any outstanding debts the business has and must settle with creditors, vendors, and suppliers before dissolving the company. If a business doesn’t have the funds to pay its debts, the owners may need an attorney’s help to understand and comply with the state’s laws for settling claims.  

After debts are settled, remaining assets are typically divided among the business’s owners according to the terms of their internal governing documents (e.g., partnership agreement, LLC operating agreement, bylaws).

8. Hold onto business records

Even years after a business closes, there could be questions or issues that arise regarding accounting records, taxes, and other matters. It’s critical that business owners maintain records in a safe place in case of a legal investigation or a tax audit. Generally, seven years is a reasonable period for keeping tax documents and other information—of course, the longer, the better. The IRS website includes the periods of limitations for specific tax-related circumstances.

Consequences of not dissolving a business properly

Missing any required steps for closing a business could result in the business owners remaining responsible for compliance tasks and fees. That’s why it’s important to understand and follow through on all requirements. 

I’ve covered many possible obligations, but there may be others depending on the entity type, business activities, state and local laws, and other considerations. Guidance from trusted professionals like an attorney, accountant, and tax advisor can help entrepreneurs weed through the uncertainties and develop a plan for dissolving their business by their preferred date without leaving any loose ends behind.

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