Life has a lot of twists and turns. Sometimes the painful decision of closing a business is one that must be made. Business entity formation gets the majority of attention but properly closing a business is just as important from a legal and liability standpoint. Even if you’re not selling or passing ownership to someone else, there are important steps you must take to ensure legal protection after the closure.
Here is your essential checklist for business closure:
The first step to closing down your business is to make the decision to do so. Whether for financial reasons or any other, it’s important that business owners are fully certain when making the decision to officially close their businesses. The time and finality of closure are difficult to reverse. Move forward wisely.
2. File dissolution documents:
When you registered your LLC or corporation, you filed articles of incorporation with your state. This documentation is what establishes your business as a legal entity and makes you responsible for paying taxes.
Filing dissolution documents reverses the filing of your articles of incorporation. They tell the state that you are no longer going to be a legal entity and halts your responsibility to pay taxes for your business. If you do not file your dissolution documents, your state will assume that you’re still in business and will continue charging you taxes and fees.
3. Cancel registrations, permits, licenses, and business names:
If you’re closing your business, you no longer have a need for the registrations, permits, and licenses required to run your business. While it may be tedious and time-consuming to individually cancel all of these tools, if you don’t, the city and state will continue charging you the recurring payments to maintain them. Canceling each element will save you money and preserve the reputation your business has a built-in case you decide to start another venture in the future.
Another aspect of your business to be sure to cancel is your trade name, or DBA (doing business as) if your business is operating under one. If your DBA is close to expiring, it may be easier to simply allow it to expire without renewing it.
Another obligation to satisfy when closing your business is canceling your EIN (employer identification number) with the IRS. To close your IRS business account, you need to send a letter to the IRS that includes the following:
- The complete legal name of the business
- Business EIN
- Business Address
- The reason you wish to close your account
4. Comply with employment and labor laws:
When closing your business, it’s important to stay compliant with relevant employment laws. For example, If you have one hundred or more employees, you should reference the Worker Adjustment and Retraining Notification Act (WARN). The Act requires that employers provide a 60-day notice to affected employees and both state and local representatives prior to a plant closing or mass layoff. California’s WARN Act imposes a similar requirement that applies to employers with seventy-five or more employees.
5. Resolve financial obligations:
Ensuring you resolve any remaining financial obligations is one of the most important factors of closing your business. You are still held accountable for any unpaid obligations in the event that your business shuts down. One of perhaps the biggest obligations that you’re likely to face are remaining income and sales taxes. Taxes must be paid in the last quarter that you were operating your business. Additionally, your taxes still have to be filed at the end of the year as usual. This may end up meaning that you’re filing taxes for a business that is no longer operating.
As stated above, another financial obligation that your business has is to your employees. Employment law requires that regardless of the financial state of your business, all laid-off employees are entitled to full payment for any work that they have completed. If you do not issue final payments to your employees, you may end up in an employment lawsuit.
6. Maintain records:
Although your business will officially terminate, it’s important that you retain any and all legal records and documentation for the proper amount of time. For example, property records should be retained until the expiration of the period of limitations for the year that you dispose of the property. Additionally, all employment tax records should be retained for a minimum of four years.
Closing your business can be a tough decision. It shouldn’t be made any more difficult by having to deal with the repercussions of closing it improperly. Following our suggested steps can help you get the process done the right way with as little difficulty as possible. For additional information and personalized support throughout the process, reach out to our team of experts at @VirtualCounsel.