How to Close a Business: 8 Obligations That Outlast the Last Sale

Closing the door does not close the business. When revenues and margins drop below an acceptable level, most owners shut down all sales or shut down the offices, let all employees go. They assume that their company automatically stops existing or becomes irrelevant with the last sale, business activity, employee, or the last customer. It doesn’t. Plenty of obligations remain, and this article explains the eight most common.

For LLCs and corporations, you must dissolve the legal entity and file documents to withdraw it from each state where it was registered. You must file final tax returns, final payroll reports, payroll tax obligations, and more. Yes, you really can be held personally responsible for payroll taxes and should deal with this up front. Obligations to payroll, creditors, guarantors, landlords, vendors and others continue after you’ve stopped operations. You must consider leases, contracts, licenses, insurance, bank accounts, and more. And, you must retain records for several years.

Selling the stock or ownership units isn’t the same thing as dissolving the company. The company may keep existing under the new owners. Selling the assets may also leave the company alive.

File Articles of Dissolution

A company may continue for years without having any customers or making any sales or having employees. Corporations and LLCs form with state approval, and only stop existing with state approval. Before closing, get owner approval as required by the operating agreement or bylaws. File articles of dissolution with the company’s state of formation. Some states call this something else, and the forms differ. Withdraw the company’s registration in every state it registered as a foreign corporation. Some states require tax clearance before dissolving. Remember that if you skip a state, the company remains subject to that state’s taxes and filings and the law, and letting the state administratively dissolve it for missed fees is no substitute for actually dissolving. Filing dissolution articles doesn’t erase the company’s liability. It starts the winding up process. The company may still collect receivables, sell property and settle claims. Rules for notifying creditors and the deadlines for creditor claims vary by state.

Notify the IRS

Whether sole proprietor, partnership, corporation, or LLC, the company must notify the IRS and file the final income tax return. Schedule C for sole proprietors. Form 1065 for partnerships. Form 1120 for C Corporations. Form 1120-S for S Corporations. Check the final return box. A corporation adopting a plan to dissolve must file Form 966 within 30 days. The IRS does not automatically cancel the EIN, but will close its account only when all returns are filed and taxes paid.

When a company closes, it must file a final Form 941 or Form 944 for the quarter in which it paid its final wages. Mark “Business Closed,” and list the final date the company paid wages. Give a W-2 to each worker by the return’s due date, with a W-3. You also file Form 940. In closing the business, you must ensure that you comply with all applicable rules governing timing of final wage payments, accrued leave and benefits. COBRA generally applies if the employer had 20 or more employees in the prior year.

When a business is not collecting money, you may be tempted to stiff employees and avoid filing tax returns or to pay personal or other expenses before paying the IRS or state, particularly when the business owes employment taxes. Payroll taxes withheld from paychecks belong to the government. Whoever is responsible for willfully failing to pay the money over can be personally assessed a penalty equal to 100% of the unpaid tax. Once it assesses the trust fund recovery penalty against a responsible person, the IRS can collect the money from that person’s own assets by way of liens, levies and seizures.

Unresolved Financial and Legal Obligations

List every debt the company has. Being closed or out of business does not automatically wipe out these debts, and it does not make debts uncollectable. Never agree to settle or pay off the loan without a final statement and written confirmation that the debt is completely settled. Dissolving the company does not generally release you from your personal guarantee on a loan or lease. If you don’t have enough money to pay everyone, don’t pick who gets paid informally. Taxes, secured debt and wages come with rules for that. If you default on an SBA loan, it is referred to the US Treasury for offset after 120 days of delinquency.

Collect the receivables, document every asset sale for tax purposes (Forms 4797 and 8594 may apply), and distribute what’s left only after paying the debts. Remember that informal transfers or distributions to owners can be challenged by creditors.

Leases are contracts. A contract is not canceled because your company is closed. Read every lease and service contract for notice rules, termination rights, fees, and rights regarding the return of property. Document or obtain written releases, especially for commercial leases, equipment financing, software and long-term supply agreements.

Do not assume that dissolving with the state closes every other licensing, assumed name or seller registration matter. Most of these exist separately and must be canceled separately. Maintain insurance until any possible claim period expires. Before cancelling insurance, ask the insurer how cancelling affects claims for events that occurred before cancellation. Take the time to secure all customer and employee information, to protect their identity and confidentiality.

Tell customers about open orders, deposits, and refunds. Keep a monitored mailing address and email for tax agencies and creditors to reach you, and reconcile bank accounts before closing them. Leave cash for taxes, fees, and outstanding checks. Do not close the bank account until everything clears, including deposits, returned checks, and balances owed to or by the account, and get a written confirmation.

The last obligation in closing the business is records. Keep employment tax records for at least four years after the taxes are due or paid, whichever is later. Keep final returns, payroll, records of asset sales, owner and other approvals, dissolution filings and creditor releases.

Know that there is no single deadline for wrapping everything up and no single schedule that applies to everyone. Factors include obtaining tax clearance, posting or sending creditor notices, notifying and terminating employees, selling company assets, and resolving ownership disputes. Build your own schedule to wrap everything up. Ignoring unresolved financial and legal obligations can be costly and create long term issues.