Closing a Business: The 12 Steps You Need to Take

  • Accracy
  • 26th Nov, 2023

In the wake of 2020, many small businesses found themselves in a crunch leading some to have to close their doors permanently. This isn't an easy decision and if you find yourself in this position, we feel for you.

Closing a Business: The 12 Steps You Need to Take
Operations

To take the complications of closing your business off your mind so you can focus on your future, we've compiled every step you need to take. Close the right way, and you can move on to the next step of your journey.

Here are the 12 steps you need to take when closing a business.

Step 1: Communicate your decision to close your business

Closing your business is a personal decision. But once that decision is made, you need to communicate it with those who will be impacted by your decision—and those who can help.

For solo small business owners (like sole proprietorships), your decision is your own. But if you are in a corporation, partnership, or have a board of directors, you're not ready to start taking the steps to close until you've talked it over with your shareholders. Everyone will have to be on board.

Inform your CPA and lawyer about the decision. If at any point in the process you feel overwhelmed, they're there to help make sure every last detail is taken care of and compliant. If you have employees, they will need to be notified, and if your business has more than 100 employees, they will need at least 60 calendar days notice according to the WARN Act.

Finally, let your customers know and set up a plan to complete any jobs in progress. Even something as simple as a social media post can notify your audience easily. If you can't complete any outstanding jobs, a lawyer can help you plan the best path forward.

Step 2: Create your exit strategy

Closing your business means legal paperwork, tax returns, and closing all of your accounts. Missing a detail can end up costing you in penalties and fees. Create your strategy and make a checklist to help you tie up every loose end so you can rest easy once the last form is filed.

The IRS (Internal Revenue Service) provides a "closing a business checklist", and we've broken the steps down to what you need to know.

Step 3: Take care of outstanding accounts receivables

Once you've closed your business, customers will be less likely to pay their outstanding invoices. Make a push to collect as much as possible before announcing you're closing. For those long overdue invoices, try offering a discount for immediate payment.

If you want to keep collecting outstanding invoices off your mind, a factoring company can help. Factoring is selling off outstanding invoices to another business.

Factoring companies (like BlueVine) pay you the invoice amount—minus a fee—to take your accounts receivable off your hands. While you won't receive the full amount of your outstanding receivables, it might be worth it for the quickness and ease of mind. Having this extra cash will also help cover any of the costs from closing your business.

Further reading: What is Invoice Factoring and How Does It Work?

Step 4: Sell off your business assets

As you go through the process of closing your business, evaluate what's left in terms of inventory and remaining assets. Vehicles, equipment, and machinery can be sold on resale platforms. Ritchie Bros. Auctioneers specializes in reselling of heavy equipment. CarGurus is the most visited online car marketplace for any vehicles you're looking to sell.

For your inventory, a final sale can move some of your remaining stock. But if you're looking to sell your outstanding inventory fast, there are companies that will buy up unsold inventory. Liquidators like Liquidation.com can take your inventory off your hands quickly—but at a significantly reduced price.

Try to move as much as you can through promotional pricing leading up to the closure. By increasing the discount gradually over time, you earn more on your inventory before resorting to using a liquidator.

Step 5: Follow up on your debts

Inform your creditors (lenders you've worked with) that you are closing your business and square off any outstanding debts. This means following up on any business loans, lines of credit, or leases in the business name and closing the account. State laws will dictate how much notice you will need to provide when closing.

Step 6: File dissolution documents

Once your financial situation is clear, it's time to start filing articles of dissolution. File articles of dissolution or application of withdrawal in every state you're registered to conduct business in.

These documents must be filed with the secretary of state. They ask mostly simple identifying questions about your business. The process varies state-by-state but most offer an e-file option making it quick and easy.

Keep in mind, business owners are responsible for taxes, fees, and any liabilities until a company is dissolved. You are not dissolved until your submitted form is approved by the state.

Step 7: Close your accounts

Over the course of running your business, you probably had to open up accounts for different purposes. Now it's time to make sure you close them all down.

Start with the cancellation of any licenses and permits including your seller's permit, business license, employer identification number (EIN), and fictitious or assumed business name. If you have employees, you need to close down your state tax and unemployment accounts. Close down your workers compensation policy as well.

Save closing your business bank accounts and credit cards for last to cover any remaining expenses you'll have.

Step 8: Cancel your sales tax license

To avoid any future billing, fees, and penalties, reach out to your state department of revenue to close your tax accounts. For example, in Louisiana this is done by submitting a Form R-3406. Once this is done, remit your final payment to tie up any loose ends.

Remember that sales tax is handled at the state level. For each state you are operating in and collecting sales tax, you must cancel your license and remit a final payment.

Step 9: Take care of your employees

If you have employees, make sure they have everything they need.

Make the last of your payroll payments, run your last payroll report, then file the necessary payroll tax forms. Submit the last of your state unemployment tax (SUTA) and distribute W-2 forms to your employees. Then file employment tax forms 940 and 941 to the IRS and make the last of your social security payments.

Step 10: Close out your books

Once you've taken care of the last of your liabilities, it's time to take care of the books and assess what's left. Decide on how to distribute the remaining money in the business and then get your bookkeeping caught up to the last transaction. If you've got a backlog of bookkeeping, Accracy can help.

You won't be able to take care of that final business tax filing without accurate bookkeeping up to the last day of your business.

Step 11: Handle your final returns

When closing your business, you are responsible for filing one last federal tax return before being closed. Here's how for each business entity type:

  • Sole proprietors will file their return as usual before the April 15 deadline using IRS Form 1040. Since your tax return is the same as your personal return, now extra steps will need to be taken.
  • Partnerships and LLCs (Limited Liability Company) will file their return on IRS Form 1065 before the March 15 deadline and check the "Final Return" box. Partners will have to report their income on their Schedule K-1.
  • Corporations will file their return on IRS Form 1120 before the April 15 deadline. You'll have to file IRS Form 966 to dissolve your corporation.

If you hired contractors and paid any of them more than $600 over the year so far, you will have to issue them 1099 forms. This will require filing form 1096 to the IRS as well.

If the cost of your potential tax bill is a worry, an offer in compromise is a solution. An offer in compromise is negotiating a payment plan if you can't pay your tax bill or doing so would put you in financial hardship. You can find more info in the IRS's guide here.

Step 12: Maintain your records

At this point, you've now closed your business. However, you still have one responsibility left.

The IRS requires you to hold onto tax and employment records for up to 7 years after your business closes. So hold onto every document from the process and consider digitizing them to store on Dropbox or Google Drive. This way, if a moment comes where you'll need to refer back, it'll be accessible to you so long as you have WiFi.

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