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Whatever the reason–whether due to financial strain, or pursuit of a new venture–it’s important to allow yourself ample time when closing a business. Equally important is the order in which you do it. Taking the right steps and taking them in the right order may help you avoid conflict with creditors, lenders, partners and even the IRS further down the line. Consider consulting an attorney if you are filing for bankruptcy as the steps to follow may be different. The folks at Edge Financial can advise you of potential liabilities or steps that are unique to your business.
Begin with a vote; unless your business operates as a sole proprietorship, you must follow any state statutes or organizational documents that require a vote from you and your associates before dissolution. Once a decision has been made, notify your creditors. Creditors are limited to time in which they have to collect all debts–usually 30 days–so it’s important not to wait. If applicable, also notify the property landlord per your commercial lease. It is also advisable to inform customers and complete any outstanding projects at your discretion to protect your reputation. In accordance with federal law, employees must be notified at least two weeks in advance. Leaving contact information for employees and when closing other business accounts means that outstanding issues can still be resolved after the phones are turned off.
Oftentimes, it will be required to liquidate remaining assets to pay these creditors off. Collect all money owed to you and sell off remaining inventory. If you plan to sell off retail equipment you may be required by state “bulk laws” to notify creditors. Also, by contacting creditors early you are more likely to reach a settlement.
At this time write to the IRS using your EIN stating intent to close. Your state corporations or LLC unit — usually a division of the secretary of state — should have additional forms necessary you’ll need to complete to comply with state obligations. You may need “tax clearance” or “consent to dissolution” from your state tax board, declaring that all of your business taxes have been paid. Cancel permits, licenses and fictitious business names by contact issuing agencies and your county clerk.
It’s crucial to settle all debts but be sure to pay your taxes first! Even if you’re doing business as a corporation or LLC, the IRS could take personal assets to pay business debts and often bankruptcy won’t help. When filing your state and federal return, check the appropriate box that relates to your business entity and indicates this tax return is your last. If you’re required to complete a federal unemployment tax return (IRS 941), you will also find a place to indicate this. Finally, file all final employment tax returns for employees, final federal and state tax deposits and remember to report any tips!
So in review, let’s run through our checklist. Print this out, mark it up, fold it up into a paper plane. Whatever you do, make use of it!
Before closing up shop: