How to Close a Business or Company: A Step-By-Step Guide
There are various reasons why many small business owners decide to close their company (e.g., the business entity may no longer be making money, resulting in a voluntary dissolution).
But often, the reason can be as simple as an entrepreneur wanting to get rid of the old to focus on a new venture.
Regardless of the reasons, a proper and formal closure is necessary. It is a challenging task that must be done diligently!
It requires a ton of administrative tasks that require you to file annual reports and file articles of dissolution to formally terminate the company's state of incorporation.
This guide will help you ensure you remember all the important tasks and details to get started!
How to Close a Business or Company in 11 Steps
Closing a business is as complex as how you conduct business itself. Many steps in the process take up a lot of time, effort, and money.
We highly encourage hiring a lawyer and an accountant to avoid legal penalties and financial issues resulting from your business closure.
The following steps should give you an idea of what to expect in the coming weeks:
Step 1: Call a Business Meeting
The first crucial step is to take a hard and honest look at the state of your business. Make sure to check on your financials, whether you operate at breakeven, at a profit, or at a loss.
If you haven't been making money for a long time, it might be high time to make the tough decision.
Is the business still worth keeping, or is it best to shut it down?
The next step will depend on which of the business structures you are organized as. Formally closing your business as a sole proprietor or as the only LLC owner is not as complicated. You can make full decisions on your own.
However, if there are other owners, partners and investors involved, a meeting must be called to allow all parties to formally vote on the decision of dissolution.
This meeting must abide by the business closure process outlined by the operating agreement on your company bylaws. The official vote should also be kept with the corporate records through a written resolution.
If you don't have an operating agreement, you may follow the requirements in your state's LLC laws.
Step 2: Plan a Strategic Exit
After a decision of closure has been made, it is time to designate a registered agent and perhaps get help from lawyers, bankers, accountants, tax professionals, and the IRS.
A mapped-out exit strategy at the beginning of the whole process will help you navigate the business closure more smoothly.
NOTE: These may cost you more money as you cease operations.
The following are necessary when mapping out your exit plan:
- File dissolution documents
- Cancel business names, permits, and licenses
- Resolve financial obligations
- Comply with labor and tax laws
- Keep necessary records
All of these we will discuss in detail in the next steps below.
Step 3: Notify Your Staff
Inform all your employees as soon as possible! To avoid confusion, it is best they hear the news directly from you and not from anyone else.
If you have more than 100 employees, you are required by employment and labor laws to provide at least 60 days' notice before any mass layoffs.
You should also make sure to pay employees their last paychecks on their last day. This should already include any accrued and unused vacation leaves if your state laws require it.
If company property like mobile devices, cars, and laptops are in the hands of your employees, it is about time to collect them too.
Step 4: Collect Outstanding Accounts Receivables
Once you've officially announced you are going out of business, collecting outstanding payments might be difficult.
But with tax and legal fees piling up, you will need all the cash you can get!
With that, it is wise to implement an aggressive collections strategy. You wouldn't want customers assuming they can stall payments any longer or not pay at all.
Here are helpful tips you can do:
- Offer discounts for immediate payments.
- Instead of sending out letters or e-mails, give customers a call or visit them in person.
- For accounts you can't collect, consider selling them to a factoring agency. These agencies purchase unpaid invoices at a discounted rate. You won't get the total amount owed, but at least you get a percentage back.
Step 5: Sell Your Inventory and Other Business Assets
If you have excess inventory or valuable assets you don't need for your next venture, sell them! It can provide you with extra cash so outstanding debts get paid.
Consider selling inventory and assets on online marketplaces or sites like eBay, Amazon, or Craigslist.
Step 6: Alert Your Customers and Close Accounts
Closing a business is heart-wrenching for any entrepreneur. But guess who else will feel sad too? Your loyal customers!
Don't leave customers stranded at the last minute. Some of your patrons might find it difficult to find another supplier.
So make sure to let customers know your intention to close the business.
If you have jobs in progress, finish them as soon as possible. If not, make the necessary refunds or negotiate an early termination.
Some states may require you to publish a statement in your local paper. A press release or an announcement across your social media platforms would be nice too.
Step 7: File Dissolution Documents
Articles of dissolution formally mark the end of your business entity's existence. It is the opposite of filing articles of incorporation or organization upon the formation of your business.
If you don't file articles of dissolution, the state will assume you are still operating. They will expect you to file annual reports and pay continued taxes and fees.
If you fail to do so, you will be charged fines and penalties.
Your articles of dissolution must be filed in the same state where you registered in. The rules for filing a "Certificate of Dissolution" will vary from state to state. Make sure to check the rules and discuss them with your lawyer or accountant to be sure.
In general, sole proprietors don't need to file anything with the state.
Step 8: File Final Tax Requirements
For sole proprietors, LLCs and corporations, the IRS website will be your best guide concerning any tax obligations you need to meet. You will find a business closing checklist with the necessary forms and additional state and local requirements.
For any small business, you need to AT LEAST file the following:
- When filing your final tax return, check "final return".
- Cancel your Employer Identification Number (EIN), as this is also linked to your IRS business account.
- File federal tax deposits and employment taxes, including a Form W-2 for the calendar year for each employee for their final wage payments.
- If your employees receive tips, report final tip income.
- Pay sales tax and report the sale of any business assets.
Some states will require you to pay all these taxes before you can file articles of dissolution.
Step 9: Cancel Registrations, Licenses, and Permits
Depending on which agencies your small business is registered in, make sure to cancel all business licenses, registrations, and permits. This avoids additional taxes and penalties.
If you filed fictitious business names, contact your local licensing authorities and have them cancel these. Take note that canceling your business name and other obligations may also need to be done outside the Secretary of State's office.
Step 10: Notify Creditors and Pay Business Debts
After taxes have been paid, it's time to pay other creditors. Make sure to send a formal notice advising them of your closure. Some states will require your small business to notify creditors before filing articles of dissolution.
Creditors need to submit claims with a deadline established by state law. In most states, it is between 90 to 180 days after the date of the notice.
This notice will help create a time frame for you to do the following even after you've closed:
- Wrap up your business affairs
- Pay back outstanding debts
- Prevent creditors from resurfacing
Step 11: Close Your Business Bank Account and Distribute Assets
After everyone has been paid, it is time to close your business bank account and cancel business-related credit cards.
In case you cannot pay all your business debts, try to negotiate with your creditor or seek advice from a lawyer if you consider filing for bankruptcy.
If, on the bright side, you are left with funds, distribute remaining assets to all business owners.
When Should Small Business Owners Close?
It's not an easy decision to close your small business. Here are some tell-tale signs it's best to let it go:
- You aren't making money or meeting your projections.
- You've tried every marketing strategy yet are still not making ends meet.
- Your competitors are taking the lead.
- You don't get repeat sales from long-term customers.
- Work and personal relationships are compromised.
- Your key employees are leaving.
Frequently Asked Questions
We've got you covered with answers to more questions about closing your business:
Can You Shut Down Your Own Business?
YES, you can decide to close a business on your own if you are a sole proprietor. For a partnership, limited liability company (LLC), or corporation, a mutual agreement or majority vote has to be reached.
How Much Does It Cost to Close a Company?
Dissolving a corporation will incur a few costs. The total cost will depend on many factors, including outstanding debts, legal fees, employees' final wages, and taxes.
Do I Have to Pay Taxes if I Close My Company?
YES, you still need to file and pay final taxes before dissolution. It is best to consider the tax advice of an accountant. Even if the business is about to close down, there may still be taxes due by the next filing season.
Is It Better to Sell or Close a Business?
Even if your business is operating at a loss, it is still possible to find a buyer for it. A potential buyer may be able to manage your business differently or finance the business better.
If you cannot find a buyer for your business, it may be more practical to close it. You can negotiate with creditors on how to resolve your obligations. If not, filing for bankruptcy is an option.
Whether you are in a sole proprietorship, LLC, or corporation, being prepared to file articles of dissolution should be taken seriously.
As you close your business, we hope this article containing the step-by-step processes is of great help!