Sometimes, entrepreneurs decide to close, sell, or transfer their businesses years in advance and have plenty of time to plan their exit strategies. Unfortunately for many other business owners, circumstances beyond their control may leave them with no choice but to halt operations for good. Whatever the reason for shuttering your company, you’ll likely have some questions about how to proceed.
In this article, we’ve compiled several common questions business owners may have about closing a business, with answers designed to make your transition as smooth as possible.
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How do I dissolve my business?
Following the appropriate steps to dissolve your business is important, as doing so can limit your continued liability. Dissolution involves formally notifying the following (among others, as applicable):
- Secretary of State’s Office (in each state in which you do business)
- The IRS
- State tax authorities
- Licensing agencies
You will need to file formal Articles of Dissolution and pay required fees to the state business authorities. If your business has more than one owner, you should also create a formal resolution of the members, shareholders, or partners. This document officially approves the decision to close the business and authorizes the corporate officers to take action as needed to terminate the company’s operations and state registration.
Don’t forget to also cancel business licenses, permits, and trade names/assumed business names.
What should I do with assets when closing a business?
Unfortunately, sometimes there are more debts than assets when it’s time to close a business. List your business creditors, including:
- Utility companies
- Third-party service providers
If your business has sufficient assets to meet all obligations, then pay your outstanding bills and ask creditors for ‘paid in full’ letters to document you have satisfied your accounts. Don’t forget to include business tax obligations not yet paid. Consider paying employees in full on their last day of working for you (this may be mandatory in some states). After paying for costs associated with dissolution and outstanding debts, remaining assets should be divided by the business shareholders or members as provided in the shareholder or member agreement.
If your business does not have sufficient assets to satisfy all of its obligations, reach out to creditors about settling your accounts with them. Understand that if you are not able to pay your creditors in full, they may file claims against you for payment. The window of time for filing claims and circumstances around such claims are defined by each state’s laws. In some cases, it may make sense to file for business bankruptcy protection.
How do I tell my staff I’m closing the business?
There is never an easy way to tell employees that you have made the difficult decision to close your business. If possible, give your employees some notice. It is also important to understand and comply with all applicable local, state, and federal employment and labor laws.
Business consultants recommend being as honest and straightforward with staff as possible, explaining the reason you need to close the company. Plan your communication as carefully as you can and anticipate questions from workers about what the decision means for them. Employees will likely need guidance when it comes to what to tell customers, when and how they will be paid, and whether you will be able to offer any assistance as they search for new roles.
How do I report closing a business?
Report your business closure by contacting your state’s Secretary of State or other business authority, as discussed more fully above. You will need to take this step in every state where your company is registered to conduct business. The good news is that in most states, dissolution forms can be filed electronically.
The IRS website provides resources for small business owners who are closing their doors for good, including forms used to report asset sales and transfers. If your business was required to file separate tax returns, you will need to file a final return by April 15 of the year after you have ceased operations.
What other things should I do when closing a business?
If you have customers who have not yet paid for goods or services provided, make attempts to collect on their accounts before you officially close your business and distribute its remaining assets. Some business owners find it is easier to collect on outstanding debts by calling customers rather than sending letters. In some cases, it may make sense to offer a discount for paying immediately. Try to collect on debts before notifying customers your business is closing, as doing so will likely increase your chances of collecting.
You will also need to cancel your company’s online presence, including:
- Social media profiles/accounts
- Business referral services
- Search engine listings
Taking a deliberate approach to removing pages and listings with each site or service provider can ensure you capture all of them.
Seek legal guidance when needed for a smooth dissolution
Closing your business is rarely easy, but doing so deliberately can help you avoid legal liability down the road. As you can see from the discussion above, there are many considerations involved in dissolving a business. Consulting an attorney and tax professional can help ensure you have taken all appropriate actions to protect yourself from future claims, so you can start the next chapter in your career with confidence and peace of mind. If you have questions about closing down your business in light of COVID-19, you can access free legal advice and essential documents in the Coronavirus Legal Center.