Closing a business can also be referred to as "winding up." More goes into shutting down a business than locking the doors and putting the “out of business" sign in the window. When a business closes, business owners must take a series of legal steps to ensure they meet all state laws and pay everyone.
The Small Business Administration (SBA) has all the forms to dissolve a business. Small business owners can contact the SBA with any questions they have when winding up their business affairs.
This checklist contains the steps most businesses will follow as they close up shop. Depending on your business structure, you may not use all these steps. Sole proprietors do not need to file a certificate of dissolution. Large corporations may need to take each step before their board of directors.
- Decision to dissolve: All owners or partners of a business entity must agree to dissolve. If your company has articles of incorporation, they should contain provisions for a vote for dissolution. Some business types, such as sole proprietorships or partnerships, may use a more informal method of determining how to close the business.
- Set a timetable: Discuss these steps with your partners and experts. Developing reasonable time frames for each step will not be simple. Plan for emergencies and unexpected delays.
- Gather experts: You may want help with your dissolution. Small businesses may not have them on staff, but you may need an attorney, a CPA or accountant, and a business valuation expert to aid your winding up.
- File articles of dissolution: If your business filed articles of incorporation or partnership, you should file articles of dissolution with the Secretary of State. This puts your creditors on notice that your business cannot take on more business debt.
- Calculate business assets and inventory: Some experts recommend a business valuation at this stage. These can be expensive, but they can support any business claims or litigation. You will need the total assets to determine your business tax returns.
- Announce layoffs and issue final paychecks: Your employees should not be the last to hear about the impending shutdown, and they should receive their pay without having to take you to court over it. Some states, such as California, require a final paycheck on the day you announce the business is closing.
- Notify the IRS and other tax agencies: Your business is still responsible for sales tax, employment tax, and other business taxes after the dissolution. Your accountant will file an initial return and the final return the following year.
- Notify creditors and business partners: Let your service providers and partners know of the business closure. Pay or cancel all outstanding contracts and invoices. Assign any outstanding debts or make provisions for their payment after the business closes. Negotiating your debts may be possible during this period.
- Cancel business licenses: Terminate your licenses and permits. This prevents other companies from using your licenses under your business name. After you pay your final tax return, you must cancel your employer identification number (EIN).
- Dispose of remaining assets: Terminate your business insurance if you have any. Notify any other interested parties, such as the utility companies. If your company is public or has assets to distribute to shareholders, be sure these get sent to the proper entities.
- Close the business: Stop all production, sales, and services. Notify all clients and customers. Complete all outstanding orders. If you have extra stock or fixtures, you may want to hold a liquidation sale to dispose of it.
- Close the business bank account: Leave the account open until all outstanding payments have cleared. You may wish to keep the account open until filing your final tax returns the following year.
- Make arrangements for next year's income tax returns: All former employees will need their W-2 tax forms. Be sure your accountant has all the necessary information to complete and mail those documents.
- Tie up any loose ends: Pay yourself and your partners your final income. Cancel all company credit cards and debit cards. Be sure you have notified all suppliers and delivery companies.
- Keep all business records and other business documents for seven years: Experts recommend keeping original business records for at least three years after dissolution or closure. Seven years is preferable in case of an audit or legal action.
Closing Down Your Business? Talk to a Lawyer First
If you already have been working with an attorney, then they are probably well-involved with winding down your business. If you don't have an attorney or haven't worked with one in a while, you should consider consulting one when closing down your business. Find a business and commercial law attorney near you.