How Much Does It Cost to Dissolve a Business? 6 Costs Beyond the State Filing Fee

To dissolve a business, the state filing fee is usually small - $60 for New York, $40 for Texas - but then you have to prepare taxes you owe, pay off debts, and close out the payroll. The actual cost of dissolving a business lies not in the paperwork, but in the financial mess. And if you don’t pay the financial loose ends, your creditors can keep coming after you long after you file with the state.

Every State Handles Things Differently

It’s usually pretty easy to get the details online. Check your state’s Secretary of State or corporate commission website. Taxes come first. To dissolve in New York, your consent letter from the Tax Dept must be attached to the certificate; and for Texas, printouts from the Comptroller’s website are no good - you have to have the comptroller’s official account-status certificate. That’s why you need to settle your business tax accounts before filing the paperwork with the state. To get your consent or official statement, these taxes need to be resolved. If you owe back taxes, this could be expensive.

California’s Franchise Tax Board charges $800 a year for every LLC in existence in the state. They mean business: You can sit there, not making a penny, and they’ll charge you every year. Finally you decide to close down. Better do it before the end of the year, lest they levy the same tax for another year. If you leave a business open, no matter how inactive, even if you don’t make a penny in sales, state filing fees continue, and the company remains legally exposed if a lawsuit reaches it.

You can’t just close down in one state and leave a shell in another state. Naturally, you pay each state its fee, and file papers in each one. You withdraw from other states and shut down in the state you formed in. Then cancel all business permits and licenses wherever you hold them, and close any bank accounts.

Taxes and Creditors

Even if your profits dwindled to zero, a final tax return with the IRS is still due. When a corporation decides to dissolve, it must file Form 966 with the IRS within 30 days; and must prepare a final tax return, for its last period of existence, generally due the 15th day of the fourth month following.

Employees are entitled to their final pay. If payroll taxes were withheld during the company’s last quarter, a final federal employment return (Form 941 or 944) may be necessary, with due date about the same time W-2s are due. Retirement plans are closed down. Even after your entity is dissolved with the state, employment records must be retained a minimum of four years.

The IRS treats payroll taxes as a “trust fund” taken out of each check. If they appear to have been willfully evaded, as opposed to negligently ignored, the “responsible person” who made the decision not to pay the taxes can personally owe a “trust fund” penalty of 100% of them, interest included.

Selling the assets doesn’t wipe out the debts. Taxes and creditors get paid out of the proceeds before the owner gets anything. Inventory, vehicles, and equipment all have value for distribution to creditors. If you’ve actually prepared a plan for liquidation, and give them a deadline to show up and make a claim, that’s better. Even so, you are still personally liable for any personally guaranteed debt. If the creditors don’t get paid in full, they may sue. An LLC or corporation shelters you from business obligations (if formed, used, and closed right) but unpaid obligations can still make your own personal credit bad.

Advance Notice When a Plant Closes

Federal WARN rules require advance notice when a plant closes. Companies must think twice before closing down a factory, or else they’ll owe the employees back-pay and benefits for each day of violation, up to 60 days. Plus the local government can slap the company with up to a $500/day fine. If management can get everyone paid what they’re owed within three weeks of closing down, they can avoid the fines.

You don’t have to have a lawyer, but it’s helpful, if there are several members or a bankruptcy. However, even the simplest cases can take weeks, and more complicated ones, months. Closing down should be handled with the same degree of caution you gave to starting up - and for the same reason: Avoiding penalties, fees, or being hit with back taxes.