By Amber Sheppard, Esq. | Legally reviewed by Amber Sheppard, Esq. | Last reviewed January 18, 2024
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You may decide to shut down your small business for any number of reasons. You may be wanting to retire, or are facing financial hardship, or maybe you're looking for a lifestyle change.
Regardless, closing a business is not as simple as emptying the office and turning off the lights. Business owners must meet certain requirements. These requirements come from the secretary of state, state regulations, and federal and state tax procedures.
Small business owners also must meet the requirements of their internal documents. This includes getting board of director approval and making sure there is an internal paper trail. Then, there is the issue of paying off business debts, notifying business creditors, collecting money owed to the business, and finalizing the business closure.
This section includes a shutting down chronology and other resources related to closing a business.
When a business is struggling and nearing its end, managers should take extra care to avoid personal liability. Even officers in limited liability companies or partnerships may face personal liability if they are careless.
As with most things related to debts and financial obligations, it's important that you pay your taxes first. Before winding down the company, make sure you have a clear picture of your company's financial standing.
Other tips for managing a business just before closing include the following:
Your type of business entity determines the process for closing. Unless you are a sole proprietor, you will need to follow certain procedures when you dissolve your business.
If the business is a partnership and you don't have a written partnership agreement, you must notify the other partners in writing of your desire to leave.
If you have a partnership with a written partnership agreement, you need to follow the steps in the agreement.
If you're a limited liability company (LLC) or corporation, the process can be more complicated. Your operating agreement (LLC) and bylaws (corporation) determine your process. If you don't have one, then you follow state tax law and state business laws.
There are a few steps that any business will need to take before closing, regardless of its structure. We discuss the main steps to closing your business below.
These are the main steps involved in closing down a small business:
File a certificate of dissolution or file articles of dissolution with your state secretary of state office. You will need to do this in every state you operate in. You may also need to file an annual report if you're still in business at that time but plan on closing later.
In addition to the payment of any prior-year and current-year taxes (including paycheck deductions), you may need to fill out some final tax forms with the IRS and your local tax board. You will need to pay your employment tax and sales tax and file your tax returns, as well.
File paperwork with licensing agencies in order to cancel permits and licenses. This prevents others from fraudulently using your name.
You must inform creditors, credit card companies, lenders, insurers, suppliers, vendors, service providers, and others of your impending closing. LLCs and corporations must also provide these entities with a mailing address for claims and a deadline to file these claims.
You should let your bank know when you close. You don't want someone to hack into your business bank account, use your business name, or steal your employer identification number.
Either pay in full or work out a compromise for all valid claims. Pay secured creditors first.
In addition to paying and settling debts, a business in the process of shutting down will also want to collect on its outstanding bills.
You will want to sell any outstanding inventory you may have, as well as office equipment or anything else considered an asset. This is why you commonly see liquidation sales when a business closes.
Closing a business is usually not an ideal outcome for a small business owner. Unfortunately, it happens quite often. The Small Business Administration (SBA) provides helpful resources for small business owners, but nothing can replace the advice of a business attorney who knows your situation.
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