Over the past few years, entrepreneurs have faced a host of challenges, and 2022 has certainly not been an exception. Inflation has been on the rise, and consumer spending has fallen. As a result, many business owners have found themselves closing their companies due to economic difficulties. Others may have chosen to do so for personal reasons such as retirement. Regardless of why someone decides to close their business, it’s essential to recognize that ending a business’s existence involves more than simply ceasing product and service sales.
The process of closing a business is different for each structure, and various factors such as location and the presence of employees come into play. It’s crucial to consider both legal and financial considerations, which is why seeking guidance from a reputable attorney, accountant, and tax advisor is essential to ensure the process goes smoothly without missing any critical tasks.
Below is an eight-point checklist outlining the tasks involved in dissolving a business. To ensure a seamless process by the end of the calendar year, business owners should start getting their affairs in order as soon as possible.
1. Check the entity’s governance documents for procedures to follow.
Different business structures have various internal governance documents that contain provisions for handling company matters. These typically spell out what must happen to approve the dissolution of the business.
2. Verify the business entity is in good standing.
Before withdrawing a business entity in a state, the company must be in good standing by following all its ongoing compliance responsibilities such as filing and paying taxes, filing annual reports, maintaining a registered agent, renewing licenses, etc. If the business has fallen out of good standing, it must reinstate itself by taking any action required by the state before dissolving.
3. File Articles of Dissolution.
LLCs and corporations must file Articles of Dissolution to officially dissolve the business entity with the state. They must notify those states that it will be withdrawing from operations if it has foreign-qualified to conduct business in other states beyond its home state.
4. Notify External Stakeholders.
It’s common decency (and sometimes legally required) for a business to inform creditors, vendors, and customers that it’s closing. Some states require business entities to publish a notice in a newspaper or other publication about its dissolution, ensuring anyone who might be owed money or has any outstanding transactions with the business is aware of its closure.
5. Make Final Tax Filings and Close Tax Accounts.
Most companies will have tax-related tasks to attend to at the federal, state, and local levels, with rules and processes for wrapping up final tax obligations varying by jurisdiction.
6. Cancel Business Licenses and Permits.
Many businesses need one or more licenses and permits to operate legally in their state or local jurisdiction. Business owners should inform each licensing agency that the company is dissolving and request to cancel licenses and permits.
7. Sort Out Assets and Debts.
A business may have various physical and intangible assets, which it can sell to generate cash before closing its operations. It may also have debts that it must settle with creditors, vendors, and suppliers before dissolving the company.
8. Hold onto Business Records.
Maintain business records in a safe place to respond to legal investigations, tax audits, and other issues that may arise. Generally, seven years is a reasonable period to keep tax documents and other information.
Not dissolving a business adequately could result in the business owner being responsible for compliance tasks and fees. Therefore, it’s essential to comprehend and comply with all requirements, and trusted professionals such as attorneys, accountants, and tax advisors can help entrepreneurs develop a plan for dissolving their business that leaves no loose ends.