When a company decides to shut its doors for good, it’s important to officially dissolve a business the right way. It’s a difficult decision for sure but there could be many valid reasons why a business permanently ends up closing shop.
For example, among the most common causes of business closure are poor cash flow and a bad economy. In addition, a business owner may be planning to start over and explore a different industry.
Regardless of the reason and structure type, business dissolution is an important part of the process that should never be overlooked. You can’t just close a business, hang a sign outside your door and expect to be cleared of any personal responsibility or liability. In fact, there is required paperwork to file and fees to pay if you want to avoid late fees, penalties, or even potential lawsuits.
Different types of business structures
Before proceeding further with our topic at hand, these are the following business structure types in the United States:
- Sole Proprietorship
- Partnership (General or Limited)
- Limited Liability Company (LLC)
As with forming a company, the requirements for dissolving one depends on your location and your business’ legal structure.
Now here are some general reminders you should keep in mind:
Have a meeting with the board of directors
Dissolving a business has to be everyone’s decision. You want to sit down with all your members and get their thoughts and votes about the dissolution. Once everyone agrees, a written decision should be produced to be signed by every owner of the company.
Naturally, sole proprietors and single-member LLCs do not have to do this and can simply move on to the next step.
File a final tax return
Filing your final tax returns should be the first big step when you dissolve a business. In certain states, you will be asked to obtain a tax clearance or a certificate of good standing from the tax agency. This means you will need to prove that you do not have any unsettled taxes for the year that you decide to close your company.
The official Internal Revenue Service (IRS) website reminds us:
“The type of return you file – and related forms you need – will depend on the type of business you have.”
Case in point, an LLC is “a business organized under state law,” according to the IRS. As such, they “may be classified for federal income tax purposes as a partnership, a corporation or an entity disregarded as separate from its owner.”
Accordingly, you will also need to complete Employer’s Quarterly Federal Tax Return (Form 941) or Employer’s Annual Federal Tax Return (Form 944) to pay your employees’ final wage taxes.
Cancel licenses, permits, registrations, and others
To formally dissolve a business, another essential step is to cancel existing licenses, registrations, and permits that the business uses. Of course, this also includes your trade name, your employer identification number (EIN), your IRS account, and others. This is vital so as to “protect your finances and reputation,” explains the US Small Business Administration.
To do so, you will need to get in touch with local and state agencies where you obtained permits and licenses or registered your business. This is essential when you dissolve a business in order to meet state regulations.
File an Article of Dissolution
Corporations and limited liability companies (LLCs) will need to file an article of dissolution. The form is available from the state corporation division or the Secretary of State. Usually, the form requires you to provide information about the company and its members, along with its assets and liabilities.
Fees often apply and you will soon receive a certificate of dissolution as your form gets approval from the state.
Settle debts and pay employee wages
“Your state may require you to notify creditors before filing articles of dissolution,” a Forbes feature tells us. “Creditors might include lenders, insurance carriers, service providers and suppliers.”
Along with that, you also need to pay your employees’ final salary and compensation whenever you dissolve a business.
Publish a dissolution notice with the local newspaper
In some states, publishing a notice with the local newspaper is essential to dissolve a legal entity. This provides creditors with some much-needed extra notice.
In a Forbes article, we read:
“Your notice to creditors should give creditors a deadline for submitting claims and tell them that claims submitted after the deadline will be barred. Your state’s laws will specify the appropriate deadline, but it’s usually between 90 and 180 days.”
Seek help from professionals
While it’s not easy to dissolve a business, the good news is you don’t have to do it alone. You can tap experts to help you out every step of the way. Accountants, lawyers, and registered agent services can provide you with valuable guidance.
With their assistance, you will be able to navigate the entire process well, while saving time and money at the same time.