How to Close a Retail Business: 7 Obligations Specific to a Store

Closing a store doesn’t take long: when the last customer leaves, you lock up and leave, right? Wrong. To actually close, you must go through a lengthy process that includes at least seven legal steps (depending on your state): Get your closing-sale permit (if required). Give your employees layoff notices. Pay all employees’ last paychecks and issue the required tax forms. Handle gift cards and layaway deposits. Carefully interpret your lease: just because you closed doesn’t necessarily mean you’re out of it. Sell inventory. Close your state and sales tax accounts, if required.

You may be required to obtain a permit before you can have a going-out-of-business or liquidation sale. Closing-sale rules vary wildly. In Virginia, it is illegal to advertise or hold a going-out-of-business sale without a permit from each city, town or county where it happens. Skipping the permit is a Class 1 misdemeanor.

Lay Off Employees

If you have to lay off employees in connection with the closing, you may have to give them advance notice and follow certain other rules. If you have 100 or more full-time employees, the federal Worker Adjustment and Retraining Notification Act can require that you give your employees at least 60 days notice and follow the law’s other requirements. A plant closing under the law is the physical shutdown of a single establishment or facility resulting in loss of employment for 50 or more full-time employees at the facility during any 30-day period. You must give a notice to every affected employee and to each union representing any affected employees at the establishment; you must also send a copy to the state rapid response agency and to the chief elected official of the unit of local government in which the establishment is located.

When you pay employees’ last paychecks, you must also file a final Form 941 or Form 944 for the quarter you pay final wages, to report income tax withheld on employee wages. Form 941 is the Employer’s Quarterly Federal Tax Return, while the Form 944 is the Employer’s Annual Federal Tax Return. Your next payroll tax duty is to give employees their Form W-2s by the due date of that final return. This form summarizes the wages the employee earned and taxes withheld.

If you sold gift cards, federal law requires that card funds can’t expire sooner than five years after you issue the card or reload it. Tell your customers what will happen to gift card balances and with layaway orders, and pay back or deliver the goods where required. In bankruptcy, unpaid customer deposits (up to $3,800 each) and employees’ final paychecks (up to $17,150 each) are considered priority claims. For workers, this includes employee wages and salaries for services the workers provided to the business within 180 days before the date of the petition (or the date you cease business, whichever happens first).

Break the Lease

Your lease probably has rules about closing that could extend your financial responsibilities past your last day in the building. Your lease lasts until you either fulfill its terms or successfully break the lease in a way that gets you out of the lease. First, you must review your lease carefully and make sure you understand exactly what it requires for you to break the lease. If you guaranteed the lease and this guarantee is continuing, you may have to continue to pay rent even after you leave the premises.

Get a written release: If your lease doesn’t contain a release clause, get a written release from your landlord stating that you won’t be responsible for future rental obligations under the lease. Include any guarantees that you or a third party signed with respect to the lease.

As for inventory, a liquidation sale involves selling off or otherwise getting rid of a company’s inventory and assets, leaving you with some cash to pay creditors. Avoid selling fixtures and equipment to yourself below market value, since creditors could challenge it. Asset sales must be reported on Form 4797, Sales of Business Property. Form 8594 must be completed when a complete business is being sold.

All too often, you might think that you can raid the cash register as soon as sales end. But that’s not true. You might not have as much cash to pay creditors as you thought when you agreed to the closing sale. Look at your bank account, other creditors and outstanding bills (for taxes, rent, payroll, supplies, etc.), and the reality of what the store will yield. Pay creditors in the right priority to avoid having your payback challenged.

Closing the Business

To end your state business tax obligations, file a final tax return with your state and request that the state close your tax account. File a final report and terminate the business permit or account for state and local sales tax, as well as any other local taxes. Closing the business doesn’t mean the company is dissolved. If you don’t dissolve a corporation or LLC in every state where it was formed or registered, you may still be responsible for taxes, fees and annual reports. Formally dissolving means sending the state a formal document that says the business is closed. Some states will require that you file a letter of tax clearance from your revenue department before they will issue a certificate of dissolution.

Check that all business licenses and permits issued to you personally or to the business have been canceled. Let vendors know that the business will no longer be purchasing their goods or services and when final payments will be sent. It’s essential to start making collections before you close up shop, or at least immediately thereafter. Cancel bank accounts and credit cards once you’re done with them. Ask the bank to provide a written confirmation. If you cancel business insurance, make sure you know exactly when your coverage terminates.

It’s not a good idea to throw away your business records right away. Keep copies of employment tax returns (Forms 941, 940, 944) and related documents supporting the tax and payroll information, including W-2 and W-3 forms for at least four years.

You don’t want to just hand back the keys and hope everything turns out okay. Before doing so, make sure that (1) you know you’re really out of the lease and (2) you have confirmation that you’ve completed all the paperwork.