Making the decision of closing a business is hard no matter the reason, whether you are closing for financial issues, retiring, or looking for a new business opportunity. It’s not something you take lightly, and the entire process can be stressful. Unfortunately, closing your business isn’t as simple as shutting off the lights, locking the doors and walking away.
There are many things to consider before you shut your doors, including paying off debts, handling tax issues and even managing relationships. Failure to close your business properly can have long-term negative effects, so follow along as we walk you through the steps that will help you properly close your business and move on.
Step One: Partners/Members Vote
Even though you’re ready to close the business, your partners or membership may not be. All members must vote to close the business. And to keep it formal, record the meeting and file the minutes in the business records.
If the business is a corporation, the bylaws or articles of incorporation should have laid out the rules for formally dissolving the business and you should adhere to them. If it’s an LLC, the operating agreement should detail the formal procedure. Typically, majority rules, with 2/3 of the vote needed to win, although in some cases businesses may require a unanimous vote.
If the business is a partnership, you may have created a partnership agreement that details dissolution procedures. If the partnership agreement was never established, a written notice is all that you need to inform your partner you’re leaving the business.
For a business with no clearly defined dissolution procedures, it’s a prudent idea to check with your state and follow their business guidelines.
Step Two: Pay Your Debts / Collect Your Cash
You must give a written notice to all of the businesses’ creditors. Some states require you to provide the notice before officially filing for dissolution. This includes giving creditors a deadline to submit claims – usually between 90 and 180 days of receiving the written notice, although each state determines that time frame. It is your responsibility to inform all creditors that no claims will be accepted after the deadline.
Because you may not be aware of all possible creditors, a notice should be published in the local paper to inform the public you are shutting down. This notice should include information on what is needed to file a claim, a mailing address and the time frame stipulation for filing. This can range anywhere from two to five years, so check with your state for specific rules.
Ultimately, all debts must be paid before you can distribute any remaining money to the owners. If the business cannot pay off the debts, it may be helpful to contact legal representation to help determine a settlement or file for bankruptcy.
Keep in mind that if this is a partnership and the debts cannot be paid, each partner is personally responsible for paying off the remaining debt, and creditors are then allowed to target personal assets.
Conversely, be sure to collect any money owed to the business as soon as possible. It is much harder to collect payments when the business is gone.
Step Three: Close all tax debts
Just like creditors, the government expects to be paid what’s owed them. You must notify the IRS and pay any outstanding taxes for the business. Payroll tax deposits should be paid, and final federal and state employee tax returns should be completed if the business has employees. You and your co-owners will be liable for unpaid payroll taxes if you skip this step.
The IRS offers a checklist for closing a business that helps to ensure you’ve met all the necessary requirements for your type of business structure.
When you’ve completed all of the necessary tax requirements, be sure to file the annual federal and state returns for the year you go out of business. There is a box to check indicating that this is the final return.
Step Four: File the Articles of Dissolution
The Articles of Dissolution formally dissolves the business and notifies all creditors that the business can no longer incur debts and determines the division of assets. This document must be filed with the secretary of state or business filing agency where business has been conducted.
If the structure is a partnership, a dissolution form may be required. State requirements vary and it may take up to 90 days to complete. Once the partnership is dissolved, no partner will incur debts on behalf of the partnership.
Step Five: Tying up Loose Ends
Creating a checklist helps you manage the small, yet significant tasks that need completing when closing a business. Remember to cancel any business licenses and permits, insurance policies, and healthcare policies. Don’t forget to inform your landlord if you lease your business space. Lease agreements typically have clauses that dictate what happens for early termination, and it’s your responsibility to know the expectations ahead of time.
Business records need to be stored for three to seven years, so it’s important to make arrangements for the storage and easy access of those records.
Remember, the process and requirements vary by state and business structure. Consider consulting a business attorney or company like DoMyLLC that knows the guidelines for each state to ensure you’ve met your legal obligations before dissolving your business.