In the life cycle of an entrepreneur, shutting the doors on a business isn’t necessarily a gloomy situation. The end of one venture often signals the start of something new and the beginning of the next exciting journey. This is particularly true in the fast-paced high-tech and software world, where only a small percentage of startups mature.
Yet to embark on the next project, you’ll want to properly close the books on your previous company. There are legal and financial ramifications at stake: Without formally closing a business, you can still be charged fees and required to submit tax returns to the IRS (including an annual report to the state).
Additionally, closing a business the ‘right way’ ensures the network, reputation, goodwill and momentum you’ve built with the first company can be gracefully transitioned to future projects.
Here’s the seven-step process to formally close your business:
1. Dissolve Your LLC or Corporation
An LLC or Corporation can be dissolved as easily as it’s created. Essentially, you’ll need to file a form called “Articles of Dissolution” or “Certificate of Termination” with the Secretary of State’s office in the state where your LLC/Corp was formed.
If you’ve been operating as a Corp, LLC, or Partnership, all business associates need to vote on closing the business. This final vote should be recorded in the meeting minutes. If shares were issued in a Corporation, two-thirds of the voting shares must agree on the dissolution. If no shares were issued, the Board of Directors must approve to dissolve the company.
If you’ve been operating as an LLC, review the dissolution requirements in your state’s LLCA (Limited Liability Company Act). Every state statute has a different set of provisions, so be sure to follow your particular statute to the letter. Otherwise, members of the LLC can be held liable for debts of the company after it’s been dissolved.
2. Pay Off Debts and Get in Good Standing
Any outstanding company debts must be paid. In most states, an LLC or Corporation must settle its debts before any distributions can be made to members. If your business doesn’t have enough money to pay off all loans and debts, you should consult an attorney -- it’s possible that members could be held personally liable for those debts after the business is dissolved.
3. Close Federal and State Tax Accounts
Notify the IRS that your business is no longer operating by shutting down the Employer Identification Number (EIN). You’ll also need to file your final federal and state tax returns (check the box indicating that this will be the final return). If applicable, your company’s payroll withholding taxes must be up-to-date (members can be held personally liable if payroll taxes aren’t paid).
4. Return Cash Reserves to Owners
After debts have been paid, the remaining assets and cash reserves should be distributed to the owners/members in proportion to ownership interest. Again, no assets can be distributed until all debts have been settled.
5. Cancel Any Permits and Licenses
Contact the county where your business is located and cancel your business license, as well as any other permits you hold. Don’t just let this expire, because you could still be assessed fees and taxes even though your business is no longer in operation. If you have a seller’s permit, cancel that as well. And if you have been using a fictitious business name, you’ll need to file an abandonment form. There’s no reason to hold on to any of this, and you don’t want to be liable if someone else accidentally or intentionally uses your seller’s permit or other license.
6. Notify Any Vendors, Contractors, and Clients
If you’re closing a business, it is likely that you don’t have any active clients or you’ve already made preparations for stopping work. You should also take the time to notify any contractors, freelancers, vendors and suppliers whom you have done business with -- don’t just leave them wondering as your business tapers down to zero. By being upfront with and considerate of your contractors and suppliers, they’ll be more likely to help you on your next venture. Your strength as an entrepreneur and business leader depends heavily on the caliber of your network.
7. Close Just Like You Opened
Take the whole process of closing your business just as seriously as you did opening it. Your credit and reputation are at stake. If you know you’ve moved on from a business, start the dissolution process as soon as possible. There’s simply no reason to pay an extra cent in fees and paperwork toward a business you know you’re retiring. Put all that effort to your next project!