How to Close Your Business

Practice Areas

By: Jyoti Jhaveri

There may come a time when business owners need to end their business and close operations. This is a multi-step process, which we have outlined below.

STEP 1: Approval from business owners 

If you own a corporation or a limited liability company (LLC), you must secure approval for dissolving your company from all shareholders or members.

At small businesses, the shareholders or members of your company are generally involved in day-to-day operations and are aware of how your company is doing. Your company’s bylaws (corporation) or operating agreement (LLC) should outline how your company should pursue dissolution, and which approvals are needed.

In a corporation, your board of directors must draft and then approve a resolution to dissolve your company. Then, your shareholders will vote on this resolution. You must document and place these actions in your corporate record book. While LLCs do not face the same requirements, you should still document the decision to dissolve your company and its approval by members.

Step 2: Dissolving your business with the state 

You must file dissolution paperwork with the state where your corporation or LLC is incorporated. If your business has the foreign qualifications to transact business in additional states, you will need to file the same paperwork there as well.

The process to file your Certificate of Dissolution or Articles of Dissolution may vary from state to state:

  • In certain states, you may need to file these documents before notifying your creditors and resolving claims. In other states, the process is reversed.
  • You may need to obtain tax clearance before filing your Certificate of Dissolution in certain states and you would need to to pay any outstanding taxes that your company owes before completing this process.

step 3: filing taxes at the federal, state, and local levels 

You will need to formalize the close of your business with the Internal Revenue Service (IRS) and your state and local taxation agencies. Please check with the IRS for specific forms you must file, and state and local requirements.

If you have employees, you must ensure you complete all payroll reporting requirements before dissolving the company. Check in with your trusted Chugh CPAs, LLP professional to ensure you meet all the requirements for your business.

Step 4: winding up your business 

After your business’s dissolution is approved, you’ll need to close business affairs and liquidate assets.

Action to be taken:

  • Settle your business debts.
  • Notify customers, suppliers, vendors, insurance companies, and landlords of your business closure.
  • Notify your employees.
  • Cancel any registrations, licenses, and permits.
  • Withdraw from states where you have foreign qualifications.

Step 5: notifying creditors 

Send notices by mail to all your company’s creditors which detail:

  • That your company has been dissolved, or it has filed a statement of intent to dissolve.
  • To which mailing address your creditors can send their claims.
  • A list of which information they should include in the claims.
  • The deadline for submitting claims, which is usually 120 days from the date you sent the notice.
  • A statement that claims will not be accepted after the deadline.

Depending on the state, creditors may be able to file claims to your company even if they are not known at the time of dissolution. Additionally, certain states require you to give a notice in the local paper about your company’s dissolution. Check with your Chugh, LLP legal professional for more information.

step 6: settling claims from creditors 

Your company can accept or reject claims from creditors. You must pay or arrange to pay accepted claims. For example, a creditor may agree to settle your claim for 80% less than the original claim amount.

For claims that your company rejects, you must advise the creditor in writing that you are rejecting their claims. Check with your Chugh, LLP legal professional for help with settling and rejecting claims.

Step 7: distributing remaining assets 

Once your company has paid off its remaining claims, you can distribute the company’s assets to its owners. Generally, assets are delivered based on percentage of ownership. For example, a 25% owner should receive 25% of the company’s remaining assets. These distributions must be reported to the IRS.

For corporations with multiple stock classes, your corporate bylaws should provide instructions for distributing assets to your shareholders. In an LLC, this procedure should be outlined in your operating agreement. Your Chugh CPAs, LLP professional can help with distribution and liability information.

conclusion

Winding up a business is a complicated process with multiple steps. To make sure your business meets its compliance requirements, contact the accounting professional with whom you work at Chugh CPAs, LLP.

[1] Internal Revenue Code (IRC) Section 1031.