It has been a rough few years for businesses across the country, but especially so for small businesses. According to Yelp data, an estimated 60% of business closures due to the coronavirus pandemic are permanent. Companies of all sizes have had to close some or many of their locations.
Whether you’ve had to close down entirely or shutter locations in other states, it’s crucial you legally close your business so there are no repercussions down the road.
In many cases, this means you need to take action before we close out the 2021 calendar year.
Here’s what you need to know about business closures, dissolutions, and withdrawals.
Step 1: Vote On It
For a sole proprietor with no employees, closing a business is as simple as starting one. Close up shop, pay off your debts, and let your customers and vendors know. However, if you have partners (even silent ones), own a C corporation or LLC, you should have documented the method of closing in your business’s partnership or operating agreement. The first step must involve getting everyone to agree on the closure. You need to hold a formal vote, documented in the meeting’s minutes, with signatures from all partners and board members.
In addition, if the business is a corporation and had issued shares, two-thirds of the voting shares must agree on closure. LLC rules vary by state, so check with the states where you have business locations for requirements for who needs to agree to closure.
Step 2: Filing the Paperwork
After an official vote for dissolution, you must file the proper forms with the Secretary of State’s office in the state where your business was formed. Similar to filing Articles of Organization or Articles of Incorporation when you started your business, to close your business, you must now file papers called Articles of Dissolution (also called Certificate of Termination or Certificate of Dissolution).
If you fail to complete this step, your business is still open in the eyes of the state, and you are still must file the required annual paperwork and pay any fees.
What if you have locations in other states? Doing business in another state means you have filed for a foreign qualification in that state. Foreign qualification is required when:
- The business has a physical presence (office space, warehouse, or retail store) in the state.
- You or your staff has conducted in-person meetings with clients or customers in the state.
- Your business is structured as a limited liability company (LLC), corporation, or a limited partnership (LP).
- Your business has employees living/working in the state.
Your business’s state of organization is the only state where you need to file for dissolution. However, you need to start withdrawal proceedings to cancel out-of-state registrations. Withdrawing a foreign business typically includes filing a withdrawal application and paying a filing fee. Fees vary from state to state.
It is also vital to cancel all registrations, permits, licenses, and business names acquired in the states you do business. Usually, the act of filing dissolution paperwork automatically cancels your business name in the state. However, if your business registered a fictitious business name (DBA), you may need to file a separate cancellation on the DBA. Whether you should cancel a trademark after a business closure is more complicated, but if you decide to keep the trademark, you’ll need to transfer ownership to the new business or owners. More details are available through the United States Patent & Trademark Office (USPTO) or CorpNet can help.
Step 3: Remain in Good Standing
Before you can dissolve or withdraw your business from the states where you do business, your company must be in good standing, which means you have continued to file the proper paperwork on time. It also means you have settled the company’s financial obligations, such as paying vendors, employees, payroll taxes, as well as sales and use taxes. If for some reason, you don’t have the money to pay off the company’s debt, you’ll most likely need to file for bankruptcy, and the courts will settle the assets. Corporations and LLCs must pay off creditors before any funds or assets can be distributed to shareholders.
Step 4: Inform the IRS
Although your Federal Tax ID Number (EIN) forever represents your business, you should let the IRS know you want to close your business account. To close your business account, send the IRS a letter including the entity’s complete legal name, the EIN, the business address, and the reason you wish to close your account. If you have a copy of the EIN Assignment Notice issued when your EIN was assigned, include that in the letter. If the business is structured as a corporation, you need to file Form 966 for Corporate Dissolution or Liquidation.
Step 5: File Taxes
Don’t wait to file your final tax return. Once the business is dissolved, file any final wage reports, capital gains and losses, employment tax returns, and be sure to check the box labeled “final return.”
If you’re unsure you’re taking the proper steps to close your business or any of your out-of-state locations, CorpNet is here to help take the stress away and guide you through the process.
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