Closing a business: What you need to know

Every year, around 600,000 businesses close down in the US. The reasons for dissolution may vary, but company owners must all follow a similar procedure. For smaller businesses, it may be quick, but larger ones take longer. In some cases, deregistration may not be the best option. Here’s a step-by-step guide to help you navigate the process with less stress.

How to close down a business step by step

Closing down a business in the USA requires careful planning and execution to ensure all legal, financial, and operational obligations are met. Below is a step-by-step guide to shutting down your business properly:

Step 1: Decide to close the business

If you are a sole proprietor, you can decide to close your business on your own. However, if your business is a partnership, Limited Liability Company (LLC), or corporation, you must refer to your operating agreement or bylaws to determine the required procedure. In most cases, a formal vote from co-owners, partners, or shareholders is necessary to approve the business closure.

Step 2: File official dissolution documents

If your business is registered as an LLC or corporation, you must file Articles of Dissolution with the Secretary of State in the state where your business was originally established. This legal filing officially terminates your business entity, preventing future tax obligations and compliance requirements.

Step 3: Notify federal, state, and local tax authorities

You must notify the IRS by filing your final tax return using the appropriate form for your business structure, such as Form 1040 (sole proprietors), Form 1120 (corporations), or Form 1065 (partnerships). If you had employees, you need to file your final payroll tax returns, including Form 940 and Form 941. Additionally, you should contact your state revenue agency to pay any outstanding sales tax, employment tax, and franchise tax. Lastly, you should send a request to the IRS to cancel your Employer Identification Number (EIN) to officially close your business tax account.

Step 4: Pay off business debts and cancel contracts

Before closing your business, you need to settle any outstanding debts with creditors, lenders, and suppliers. It is also important to notify vendors, landlords, and service providers to cancel business leases, utility accounts, software subscriptions, and other ongoing contracts. If you have business credit lines, loans, or credit cards, you should pay them off or formally close the accounts.

Step 5: Notify employees and handle final payroll

If you have employees, you must provide them with formal notice of your business closure in accordance with federal and state labor laws. Additionally, you need to process their final paychecks, which should include any outstanding wages, benefits, and severance pay if applicable. Before the end of the tax year, you must issue final W-2 forms for employees and 1099 forms for independent contractors to report their earnings.

Step 6: Notify customers and business partners

To ensure a smooth closure, you should communicate your business shutdown to customers, suppliers, and business partners. If you have any outstanding contracts or orders, you must fulfill them or provide refunds where necessary. It is also good practice to update your website, social media accounts, and business listings with a formal closing announcement.

Step 7: Liquidate business assets

To recover any remaining value from your business, you may sell your inventory, office equipment, intellectual property, or other business assets. The proceeds from these sales should be used to settle outstanding debts, and any remaining funds should be distributed among the business owners or shareholders in accordance with legal agreements.

Step 8: Cancel business licenses, permits, and registrations

You must officially cancel any active business licenses, permits, and registrations with local, state, and federal agencies. This includes closing accounts with any regulatory authorities and ensuring that your business is no longer responsible for annual fees or renewals. It’s also important not to forget to cancel other contracts such as:

• Rental contracts
• Energy supplier
• Insurance (public liability, accident insurance)
• Phone and internet contracts
• Customer and delivery contracts
• Advertising and marketing contracts
• Bank accounts
• Mandates

Step 9: Keep business records for future reference

Even after closing your business, you are legally required to retain important business records, including tax returns, financial statements, and contracts. It is recommended that you keep these records for at least three to seven years, depending on state and federal regulations.

Step 10: File for bankruptcy (if necessary)

If your business has accumulated more debt than it can repay, you may need to consider filing for bankruptcy. Depending on your financial situation, you may file for Chapter 7 bankruptcy, which allows for complete liquidation of business assets, or Chapter 11 bankruptcy, which provides an opportunity for debt restructuring and repayment plans.

The costs of closing a company

The cost of dissolving a business in the USA depends on the state, business structure, and outstanding financial obligations. For a simple business with no debts or employees, the total dissolution cost may be as low as $50 to $500. However, for larger businesses with outstanding leases, debts, or employees, the total cost can exceed $5,000 to $10,000.

How to close down a small business

If you’re looking to close a small business, the dissolution process depends on your business structure. Whether your business is an LLC, sole proprietorship, or partnership, you will need to follow many of the steps outlined above. However, for sole proprietors and single-member LLCs, the process is typically faster because no approval from partners or shareholders is required.

If you are a sole proprietor, there is no need to file Articles of Dissolution with the state, as the business is not a separate legal entity. Instead, you must file your final tax return, close tax accounts, and cancel any business licenses or permits.

For LLCs and partnerships, formal dissolution requires filing Articles of Dissolution (or equivalent forms) with the Secretary of State. Some states may require tax clearance before approving the dissolution, meaning all outstanding business taxes must be paid first.

If your business has no employees, you can skip payroll-related filings, such as final W-2s and unemployment tax reports. However, final state and federal tax returns must still be filed, and any franchise or sales taxes must be settled.

While dissolving a small business is often simpler than setting up a new one, it is not always immediate. Some states continue to charge annual franchise taxes until dissolution is officially recorded. To avoid unnecessary costs, it is best to file dissolution paperwork as soon as you cease operations.

Dissolving a business vs. putting it on hold

If you believe you may resume operations in the future, you can choose to put your business on hold instead of dissolving it. This can be a good option if you are uncertain about closing permanently or need to take a temporary leave of absence. However, even if a business is inactive, certain legal and financial obligations still apply.

All businesses must continue to file tax returns with the IRS, even if they are not generating income. While businesses that report no revenue typically do not owe taxes, failing to file the required forms can result in penalties. Additionally, some business structures, such as LLCs and corporations, may still be required to pay annual franchise taxes or maintenance fees. For example, California charges an $800 annual franchise tax, regardless of whether the business is active or not.

Before putting a business on hold, it is important to settle all outstanding debts and financial obligations. Any long-term contracts, leases, or subscriptions should be reviewed and canceled if they will not be used. Keeping these contracts active could lead to unnecessary expenses while the business is inactive.

For sole proprietors, the process of pausing operations is simpler, as they are not legally separate from their owners. They do not need to file dissolution documents with the state, but they must still report any business income or losses on their personal tax return (Form 1040, Schedule C).

If you are unsure whether to dissolve or temporarily suspend your business, it is recommended to check state-specific regulations or consult a business attorney or tax professional for guidance.

Please note the legal notice for this article.