There are many reasons why you’d want to terminate a partnership agreement. The goals of one or both partners have changed, your working styles are incompatible, or there are fundamental disagreements about business operations and decisions. Whatever the reason, the partners must understand and follow the correct procedures and regulations for partnership termination, so all parties are legally separated from liability.

What is a Partnership?

A partnership is a legal entity where two (or more) people own and operate a business, and each partner owns a percentage of the assets and liabilities of the company. The critical difference is that the partnership agreement details the partners’ ownership and responsibilities. Although a partnership agreement is not legally required, it is highly recommended for both the partnership’s success and an amicable termination, if necessary.

What’s in a Partnership Agreement?

For a general partnership, the partnership agreement should contain the following:

• Business Name. Unlike a sole proprietorship which is usually named after the sole owner, a partnership should have an official business name that should be used on all bank accounts and documents.
• Contributions. The partners are not required to make equal financial contributions to the business—their financial obligations can vary. The agreement should contain any past, current, and future financial stakes.
• Distributions. How the company plans to distribute partner profits should also be documented. If there is no documentation for allocations, the Internal Revenue Service (IRS) considers each partner equal.
• Ownership. Here, the agreement should outline what happens if:
  • The business is sold
  • One or more of the partners wants out
  • The partnership takes on new partners
  • One of the partners is bought out
• Decision-making. Which partner has daily management decision-making power? What about group decisions? Or financial decisions?
• Disputes. In this section, the agreement documents how to handle conflicts. The goal is to keep arguments from turning into costly court cases.
• Critical Developments. This part lays out how to amend or terminate the agreement when/if a partner dies or wants to retire.

Once the partnership agreement is drawn up, it’s a good idea to have an attorney look it over to clear up any confusing language and make sure nothing is missing.

What Is Considered a Partnership Termination?

Legally a partnership continues to exist until it is terminated. What causes a partnership to end? As mentioned above, there could be numerous reasons to terminate a partnership, including personality conflicts or irreconcilable differences. However, it can also be something less dramatic, such as the partners want to change the business’s legal structure. A partnership is considered terminated if no part of its business, financial operations, or activities continues.

In any case, the partnership agreement dictates what happens when the partnership is terminated. Without an agreement, the termination terms are left up to the courts in your state. In the event of a partner’s death, the agreement could require the partnership to terminate immediately and have the deceased partner’s assets be reassigned to the remaining partner(s). Or there may be a succession plan in place for the deceased partner’s family to have a stake in the business. In that scenario, the partnership is still intact because the beneficiaries are part of the business. Likewise, if one partner wants out and sells his portion to the remaining partners, the partnership still exists.

A partnership termination is necessary when the company is reduced to one owner, ceases to do business, or changes legal structure. For example, if the latter is the case:

• From a partnership to a sole proprietorship: The steps to transfer ownership of the business from partners to a sole proprietorship should be documented in the partnership agreement. In many cases, this means one partner is buying out the others partners, and the assets and liabilities of the company will be redistributed to the remaining owner. However, without an agreement, the assets and liabilities typically are divided equally among the original partners, who then need to create documents about each aspect of the business, including company name, customer lists, etc., and how they will be distributed.
• From a partnership to a Limited Liability Company (LLC): There are several reasons a partnership may decide to restructure as an LLC. Whether there’s been a change in ownership or just a desire to change the company’s business structure, the partners need to follow the compliance rules for LLCs in their home state. This usually entails searching and filing for a legal business name, filing an LLC application with the Secretary of State, and filing an operating agreement and articles of organization. The new LLC must also obtain a Federal Tax ID number from the IRS.
• From a partnership to a C Corporation: Likewise, if the partnership decides to restructure as a C Corporation, the remaining partner/s must follow the compliance rules for incorporating in their home state. This entails searching and filing for a legal business name, filing to incorporate with the Secretary of State, and creating a board of directors, creating and filing bylaws and articles of incorporation. The new corporation must also obtain a Federal Tax ID number from the IRS.

Once the partnership votes to restructure and files for the new structure, all assets and liabilities should be transferred to the new structure. After the transfer occurs, the partners can begin the dissolution of a partnership and terminate the partnership agreement.

Difference Between Dissolution and Termination of a Partnership

In basic terms, the dissolution of a partnership refers to the steps involved in winding up the business, preparing for termination. Termination is the final result; the company has ceased all business activity and no longer exists.

How to dissolve a partnership? Generally, the steps include paying off or settling all the company’s debts, liabilities, and obligations. If all debts cannot be paid, the creditors must be notified of the dissolution so they can try and recoup some monies in court.

Once the partnership has started the dissolution process, the company can no longer conduct any business activity. A partner can dissolve a partnership if he or she withdraws from the partnership or if the partner dies.

If the partnership is registered to do business in other states, the partners must follow that state’s rules for dissolution and termination.

Tax Consequences

Any change in a business structure can result in tax consequences. Partnership termination tax consequences depend on what happens after the partnership ceases or restructures. Partnerships are considered non-tax-paying entities. The partnership itself does not pay income tax. The partners are not employees, and the partnership passes both profits and losses through to the partners.

When the partnership terminates, partners must pay taxes on any remaining profits and the liquidation of current and fixed assets. If the partners are not equal, per the agreement, then the distribution of remaining assets and losses will also not be equal. If the partnership restructures, then the assets and liabilities of the partnership can become part of the new entity, and the tax consequences depend on how the new company chooses to be taxed.

Owning a small business is the American dream. But sometimes, despite all the hard work, that dream turns into a nightmare and businesses don’t make it. Understanding why small businesses fail can be as crucial as knowing the secrets of those that succeed.

Being aware of the signs of business failure can help you spot when you need to take immediate action to keep your business going. Here’s what to avoid.

1. Lack of Experience

The challenge: Many new entrepreneurs have no prior business experience or are unfamiliar with the industry of their startup. They may not understand the basics of running a business, such as marketing, finance, and accounting, or the specific needs of this particular industry. This lack of experience can lead to mistakes that can ultimately sink a business.

The solution: Get experience. Before you start your own business, get experience working for someone else. This allows you to learn the ropes and make mistakes without risking your own money. Another option for gaining experience is to take some business courses online or in person. Chances are you can find just what you need at a local community college for little cost.

2. Lack of Market Research

The challenge: Many small business owners are so enthusiastic about their business idea because it’s based on their passion or a hot trend that they jump into starting without doing any research. However, passion doesn’t always translate to demand, and trends may actually be fads with little staying power.

The solution: Before investing time, energy, and money, it’s crucial to assess the market. Is there a long-term demand for the product or service? Who are the competitors? What differentiates your business? Comprehensive market research is the foundation upon which successful companies are built.

3. Poor Planning

The challenge: Many small business owners skip the business planning phase, thinking it’s only for large corporations or startups seeking investors. That’s faulty thinking. Writing a business plan ensures you don’t overlook crucial steps like market research (see #2) or financial projections.

The solution: Business plans are roadmaps. They help you set clear goals, determine your target audience, identify potential challenges, and establish a clear vision for the future. Business plans should include your goals, strategies, and financial projections. Without a business plan, it’s easy for a business to veer off course and fail.

Whether a detailed document or just a few pages, a business plan can make the difference between aimless wandering and a strategic journey.

4. Poor Cash Flow Management

The challenge: Insufficient cash flow is one of the primary reasons why small businesses fail. Many new business owners underestimate the cash needed to start and run a business. Overhead costs, unexpected expenses, and slow-paying clients can lead to cash flow challenges.

The solution: Regularly monitor your cash flow. Use financial tools and software to forecast and track income and expenditures. Collect outstanding invoices. Keep a six-month emergency fund, and be cautious with large, unnecessary expenditures, especially in the early stages.

5. Not Embracing Digital Solutions

The challenge: Let’s face it, we’re living in a digital age. You cannot ignore or underestimate the power of online visibility and digital marketing.

The solution: A strong online presence can significantly boost brand awareness and sales from Google searches to social media interactions. Invest in a professional website, engage with your customers on social platforms, start an online newsletter, and consider online advertising based on your target audience. Being a digital company also includes accepting digital payments like Apple or Google Pay.

6. Getting Stuck

The challenge: The marketplace, technology, and consumer preferences constantly evolve. Businesses that cling to outdated practices or fail to adapt often get left behind. Learning to pivot was key for survival during the COVID-19 pandemic, but it’s just as crucial today.

The solution: Stay current with consumer and industry trends. Ask your customers for feedback and monitor comments on your social networks and ratings and reviews sites like Yelp. Be willing to pivot when necessary. This might mean upgrading technology, rebranding, or even changing your business model.

7. Neglecting the Customer

The challenge: Unhappy customers are a key reason why small businesses fail. Some business owners spend so much time scaling or managing operations that they overlook taking care of their customers.

The solution: Prioritize customer service. Satisfied customers become loyal and more likely to refer their friends and colleagues. Handle complaints quickly (and politely), respond to feedback, always aim to exceed customer expectations, survey your customers to find out what they think you’re doing right or wrong, and be responsive to their suggestions.

8. Not Building a Strong Customer Base

The challenge: Just because you’re earning enough money to pay your bills or make a profit doesn’t mean your business is on solid ground. Too many small businesses depend on one or two clients for most of their sales. This is dangerous behavior and one of the reasons small businesses don’t succeed.

The solution: Diversify your client base, so no one customer should account for most of your sales. A diversified client base reduces your risk in case your primary customer cancels their contract or goes out of business. Diversifying your customer base can help you reach new markets and grow your business. By targeting different types of customers, you can expand your product or service offerings and increase sales.

9. Opening in the Wrong Location

The challenge: Opening a business in the wrong location can quickly put you out of business. Don’t pick a storefront or office based solely on the cost of rent.

The solution: Factors to consider when choosing the best location for your small business where your customers live or work, street traffic, access to public transportation, adequate and well-lit parking, the space you need now and for the next few years, distance from competitors, condition of the building, proximity to other businesses that attract customers, and access to a skilled workforce.

10. Not Asking for Help

The challenge: Don’t think asking for help is a sign of weakness or ignorance. It would be impossible for a new business owner to know everything about running a business.

The solution: You can get low- or no-cost advice from the Small Business Administration (SBA) and its resource partners, the Small Business Development Centers, and SCORE.  Trade organizations, local chambers of commerce, and city or county organizations may also provide advice and mentorship. If you need more assistance, consider hiring a business coach.

Other Reasons Small Businesses Fail

Being aware of the risks of business ownership can help you avoid failure. It’s also essential to set realistic goals. You’re not going to become a millionaire overnight and this means being patient.

Entrepreneurship is not easy. There will be times when you want to give up. But don’t give up on your dream. And remember, every setback or failure is a lesson, showing you what not to do the next time. Embrace the learning, adapt, and forge ahead.

If you’re planning to close your business—either close it altogether or close it in one state and move it to another—there’s a process you must follow. The exact requirements and process can vary depending on your entity type, state, location in the state, the types of products or services you provide, and other factors.

In this article, I’ll break down the key considerations by business structure to give you an idea of what’s involved. For more information about the tasks you’ll need to address when winding up your business, talk with your attorney and accountant for guidance specific to your situation.

Closing a Sole Proprietorship

Sole Proprietorships are non-entities—they have no legal separation from the business owner and are not registered with the state. For income tax purposes, Sole Proprietorships are considered the same taxpayer as their owners. They report business income on their personal tax returns. Therefore, the typical process for dissolving a Sole Proprietorship is relatively uncomplicated.

1. Inform vendors, creditors, customers, and employees that you plan to close the business.
2. Collect money owed and pay off your debts.
3. If you sell company assets, file the IRS tax form to report sales of business property.
4. Issue final paychecks and make final tax deposits if the Sole Proprietorship has one or more employees.
5. Pay final sales taxes, if applicable.
6. Make final quarterly self-employment deposits to the IRS, state, and local tax authorities. (Sole Proprietors are self-employed individuals and are not on payroll like other company employees.)
7. Cancel federal EIN, payroll accounts, business licenses, and permits.
8. File the form to cancel your DBA (Doing Business As) if you registered with the county or state to use a fictitious name.
9. Close business bank and credit accounts.

Closing a Partnership

Partnerships are also non-entities, and business owners follow the general same steps that apply to Sole Proprietorships—with a few additional tasks.

1. Get partner consensus to close the business. (Partners must agree to close the business. The company’s Partnership agreement should provide the details of what happens when the business closes, including how the assets and liabilities will be divided among the partners.)
2. Let customers, vendors, creditors, and employees know you plan to close your company.
3. If customers owe you money, collect it from them. Also, pay off any outstanding debts.
4. Sell company assets and file IRS tax forms to report sales of business property.
5. Pay employees what you owe them and make final tax deposits if your Partnership has employees.
6. If you sell taxable products or services, report and pay the final sales tax due.
7. Make final quarterly self-employment deposits to the IRS, state, and local tax authorities. (Partners are self-employed individuals and are not on payroll like other company employees.)
8. Submit your final federal, state, and local partnership tax returns. The federal return is generally due three months and 15 days from when the business is dissolved. State and local final return deadlines vary.
9. Cancel federal EIN, payroll accounts, business licenses, and permits.
10. If conducting business under a fictitious name, cancel your DBA.
11. Distribute remaining assets among partners.
12. Close business financial accounts (e.g., bank and credit cards).

It’s crucial to check with your state’s Secretary of State about any state regulations regarding Partnership closures. Depending on the state and the type of Partnership, the business may need to file a Statement of Dissolution (or similar form) to officially dissolve the company.

Closing a C Corporation

Unlike Sole Proprietorships and Partnerships, C Corporations must be registered with the state in which they are formed by filing Articles of Incorporation (called Certificate of Incorporation or by another name in some states). That formality separates a C Corporation from its owners legally and for tax purposes (the company reports and pays taxes on business income). To end a  C Corporation’s existence, it must be officially closed by following its state of formation’s dissolution process.

Before dissolving the business, the Corporation must be in “good standing,” which means its ongoing compliance obligations—such as paying state taxes and filing timely corporation documents—are up to date.

C Corporations are separate taxpaying entities, and owners/shareholders are W2 employees of the corporation—which is why the owners have limited liability from the company’s debts and legal responsibilities. C Corporations must have a board of directors, hold annual meetings, keep meeting minutes, and draft bylaws by which they operate. When deciding on dissolution, the corporation’s board must have a meeting and vote to close the business. The board’s secretary must record the decision in the meeting minutes, and all voting board members must sign the document. If the C Corporation has shareholders, a majority of them must vote in favor of closing the business. That percentage varies by state, with many states requiring two-thirds of the voting shareholders to sign off on dissolving the business.

From there, these are the general steps that follow when closing a C Corporation. The following steps also apply to C Corporations that have elected S Corporation tax treatment:

1. Notify customers, vendors, suppliers, creditors, and employees that you plan to dissolve the company.
2. Collect money owed and pay outstanding debts.
3. File Articles of Dissolution (sometimes called Certificate of Termination or Certificate of Dissolution) with the state, usually through the Secretary of State office.
4. File Corporate Dissolution or Liquidation (Form 966) with the IRS (applicable if the entity is a C Corporation or an S Corporation that was previously a C Corporation). Form 966 is due 30 days from business closure.
5. Sell business assets and file IRS tax forms to report sales of business property.
6. Issue final paychecks to employees and file final payroll taxes.
7. Report and pay any sales tax owed on the sale of taxable products and services.
8. Distribute remaining assets to shareholders.
9. Submit your final federal, state, and local corporate income tax returns. The federal return is generally due four months and 15 days from when the business is dissolved—if S Corporation tax treatment has been elected, then the federal return is generally due three months and 15 days from when the business is dissolved. State and local final return deadlines vary.
10. Cancel federal EIN, payroll accounts, business licenses, and permits.
11. Close business bank and credit accounts.

Closing a Limited Liability Company (LLC)

LLCs are also state-registered (via filing Articles of Organization) and regulated entities. They are legally separate from their owners (called members). In a Limited Liability Company, depending on state guidelines and the steps outlined in the company’s LLC operating agreement, a meeting must be held to vote on dissolution.

Once the decision to dissolve has officially been made, closing an LLC requires many of the same steps as C Corporations.

1. Let customers, employees, suppliers, vendors, and creditors know that you plan to dissolve the LLC.
2. Collect money owed from customers and pay any outstanding business debts.
3. File Articles of Dissolution with the state.
4. Sell the LLC’s business assets and file the appropriate IRS tax forms to report sales of business property.
5. Distribute final employee paychecks and file final payroll taxes.
6. Report and pay sales tax that you owe for selling taxable products and services.
7. Distribute remaining assets to LLC members.
8. Report and pay final quarterly self-employment deposits to the IRS, state, and local tax authorities. (LLC members are self-employed individuals and are not on payroll like other company employees.
9. Submit your final federal, state, and local LLC income return. The federal return is generally due three months and 15 days from when the business is dissolved. State and local final return deadlines vary. If S-Corporation tax treatment was elected, then submit final federal and state S Corporation income returns.
10. Cancel state and local payroll accounts, business licenses, and permits.
11. Close the LLC’s financial accounts (e.g., checking account, savings account, and credit cards).

Moving a Business to Another State

Although Sole Proprietorships and Partnerships can operate in multiple states, most that move their businesses to another state close them first in the existing state.

Corporations and LLCs have a more formal process to follow when relocating or expanding the business to a new state.

Ultimately, they will either:

1. Dissolve the company in the original state and register it in the new state, or
2. Continue to operate the business in its state of formation and file for a foreign qualification in the new state.

Doing Business as an LLC or Corporation in Multiple States

Foreign qualification is wise if the company plans to do business in its original state and another state. Each state has its own process for foreign qualifying an entity. Most require filing a Certificate of Authority and paying the applicable fee. When registering an LLC or C Corporation in a new state, the company must also designate a registered agent there. Registered agents must have a local address and the authority to accept legal documents and government notices in that state.

Closing an LLC or Corporation in its Home State and Moving It to Another

If a business ceases operations in its existing state and physically moves to another state, it will typically follow the business dissolution process in the former state and register as a new entity in the new state.

Alternatively, some states offer domestication (sometimes called redomestication or redomiciliation) to change the company’s state of formation. Domestication alleviates the burden of completely starting over in the new state. After domestication in the new state, the company no longer exists in the former state.

In states that allow domestication, companies must submit filings in the state they are leaving and the one where they wish to relocate their domicile.

Here’s what the domestication process typically looks like:

1. The business owners provide the following documents to the new state
   • Certificate of Good Standing from the current home state (or certified copies of all home state documents)
   • Articles of Domestication (or Certificate of Conversion or similar document) to transfer the entity to the new state
2. Once the new state approves the LLC’s or Corporation’s domestication, the company either files to dissolve or domesticate out of the former home state, depending on the state’s specific requirements.
   3. Upon completion, the company has officially moved and no longer exists in its original state of registration.

At the time of this writing, 34 states and Washington DC allow redomestication in their jurisdictions, so it’s important to check with your attorney about whether that’s an option for you.

The Devil Is in the Details

Tackling all the steps to close or relocate a company requires time and fierce attention to detail. Overlooking required filings or completing them incorrectly can lead to unnecessary costs—and even fines or penalties. That’s why it’s so important to review your responsibilities with legal and tax experts—and consider calling CorpNet at 1-888-449-2638 for assistance with preparing and submitting your critical dissolution filings.

Just like life, running a business has its share of ups, downs, and surprises, which is why there are many different reasons why business owners may want to dissolve their LLC or Corporation.

Dissolution, the act of formally dissolving (closing) a business entity with the state, involves far more than just ceasing to sell products and services. Dissolution is a process for wrapping up all legal and financial aspects of the business and legally terminating its existence in the state(s) where it is registered. Business owners and professional services providers who offer accounting, tax, or legal services to entrepreneurs should understand what goes into legally dissolving a Corporation or LLC.

Let’s dig into some of the details involved with the dissolution of a Corporation or LLC.

Top Questions and Answers for Business Owners Needing to Dissolve Their Companies

How Do I Legally Dissolve a Corporation or LLC?

Business owners must file Articles of Dissolution (also called a Certificate of Dissolution) with the Secretary of State office or comparable state agency to file for dissolution in a state. Filing Articles of Dissolution will allow you to end your business entity permanently. Before a state dissolves a company, the business must file all outstanding state fees, reports, and taxes and handle other matters related to winding down its affairs.

It’s crucial to complete the Articles of Dissolution accurately so that the business may close without delays or issues.

Do I Need to Close My Business Before Year-End?

The ideal time to dissolve a Corporation or an LLC can vary depending on the situation. Closing before the end of the year offers the advantage of avoiding fees and tax obligations for conducting business in the new year. For that reason, many business owners try to wrap up dissolution tasks by year-end

For that reason, many business owners try to wrap up dissolution tasks by year-end. I’ve written about this in-depth at 12 Steps for Closing an LLC Before Year End and 12 Steps for Closing a Corporation by Year End.

Does this Process Vary by LLC or Corporation?

The process for dissolving an LLC and Corporation is slightly different.

Before filing Articles of Dissolution, here’s what LLCs and Corporations must usually do:

• Typically, an LLC must hold a meeting with its owners (known as members and have them vote on closing the company. The record of the final vote must be captured in the meeting minutes.
• In most states, if a C Corporation issued shares of stock to shareholders, it needs ⅔ of the voting shares to agree on the dissolution. Generally, if the Corporation did not issue shares, then it must hold a meeting with its Board of Directors and ask them to vote on closing the company. In either case, the record of the final vote must be captured in the meeting minutes.

Does the Process Vary by State?

Yes, it does. It’s critical to check with the appropriate state agency (usually the Secretary of State office) to determine the requirements for dissolving an LLC or Corporation in the state(s) where the business is registered.

What if My Business is a Partnership?

In the case of a partnership, business owners must inform the IRS that their partnership is dissolving. When submitting Form 1065 (U.S. Partnership Return of Income), they must check off the box that says it is the final return. They should complete the form by the 15th day of the third month after the tax year ends.

What Happens to My Existing Customers and Contracts?

Great question! Before dissolving a Corporation or LLC, the entity should collect any outstanding accounts receivables and notify customers that the company will dissolve. If any contractual obligations remain, the business owners must deal with those. This may require the assistance of an attorney to ensure no loose ends get missed in the process.

Do I Need to Notify Creditors?

Yes, it’s important to alert creditors, vendors, and other individuals and entities to whom the company owes money. That will allow those parties to identify any outstanding debt the company owes them and ensure it’s resolved before the business closes. It’s recommended that creditors be notified by mail and provided with information regarding where and by when claims should be sent.

Can I Dissolve a Business With Debt?

When a business has outstanding debts that it cannot pay, the company may be liquidated or closed under administrative dissolution by the state. With liquidation, the company sells its assets to pay off debts before it closes. Partners, members, or directors must approve the liquidation, establish a plan, and notify creditors. The guidance of an accountant and an attorney can help ensure a smooth process. Whereas liquidation is voluntary dissolution, administrative dissolution usually occurs involuntarily when the state dissolves a business after numerous failed attempts to get the business owners to settle their deficiencies.

What Happens to My Business Debts?

If a business cannot pay off its debts before closing, outstanding financial obligations become uncollectable debt for the creditors who are owed money. If business owners have personally guaranteed business loans or debt, they may find themselves sued by creditors, thus exposing their personal assets for repayment of the business’s debts.

What Happens to My Employee Identification Number (EIN)?

The IRS requests that business owners send a letter to close their IRS business account. It should include:

• The complete legal name of the entity,
• The EIN,
• The business address,
• And the reason for closing the account with the IRS.
• If possible, they should also include a copy of the EIN Assignment Notice that the IRS issued when assigning the EIN.

Any outstanding taxes or tax returns due must be filed before the IRS will close an account.

What Happens to Liability Protection When an Entity Is Dissolved?

Dissolving a Corporation or LLC does not automatically terminate the business owners’ personal liability protection. Shareholders and members may still be protected from creditors for liabilities, provided the entity paid all known company creditors before distributing assets to the business’s owners.  If a lawsuit is filed after dissolution, owners may still be protected from liability if the company LLC had issued a notice of dissolution per its state’s requirements and wasn’t aware of the claim when the entity was in active status.

What Happens If a Real Estate Entity Has to Dissolve But Still Holds Property?

States’ rules vary. Generally, a real estate entity liquidates its real estate holdings as part of the dissolution process to terminate its existence. This applies whether the business owners voluntarily dissolve the entity or the state has administratively dissolved it.

Some states allow an entity to convey its real property even after the entity has dissolved, provided it does so in a reasonable amount of time (the meaning of “reasonable” varies by state).

Potential issues could arise if the dissolved entity no longer has a bank account (or an EIN to open a bank account) to receive real estate sales proceeds or the entity never had governance documents (e.g., LLC operating agreement or bylaws).

Possible ways to resolve those snafus include:

• Reinstate the entity so that it can open a bank account to receive real estate sales proceeds.
• Convey real property to the shareholders or members so that proceeds from the sale are distributed to each owner according to their share of ownership documented in the entity’s operating agreement or bylaws.
• Draft governance documents before formally dissolving the entity or having the owners or shareholders sign a certification and indemnification document to claim signing authority for the dissolved entity.

Talking with a real estate attorney can help ensure that all legalities are considered and handled correctly. Selling property has significant tax implications, so it’s also important to consult an accountant with expertise in real estate transactions.

How Do You Dissolve a Company That’s in Bad Standing?

If an LLC or Corporation has failed to fulfill any of its compliance obligations (such as filing and paying taxes, submitting annual reports, not renewing required business licenses, etc.), it may fall out of good standing with the state. When business owners wish to voluntarily dissolve a company in bad standing, they must first file to reinstate the entity to good standing. The rules for reinstatement vary by state. Generally, it involves resolving the issues (e.g., submitting past due reports and paying outstanding taxes and fees) that put the company in bad standing and then filing a reinstatement application with the state.

After the entity is reinstated, the owners may proceed with the usual steps to dissolve an LLC or Corporation in the state.

Is there a Checklist I Can Follow?

As I shared earlier, the process to accomplish the dissolution of a Corporation or LLC varies from one state to the next and by business entity type. Below is a handy checklist of the typical steps involved when dissolving a business:

1. Dissolve the business structure – Hold the necessary meetings and votes to obtain approval; record the results of those votes in meeting minutes.
2. File Articles of Dissolution – Let CorpNet help you by preparing and submitting the form.
3. Collect any outstanding accounts receivables – Collect money owed to the business from customers. If this might be difficult or too time-consuming, you may want to explore selling your accounts receivable to a factor.
4. Sell the company’s assets – Selling assets and inventory can help business owners generate more cash before they close their doors. Besides holding a sale at your location, Craigslist may be a viable option for selling office equipment, furniture, and supplies. Another way to sell assets is by holding an auction to attract other business owners.
5. Pay off outstanding business debts – Plan to settle outstanding accounts payables with your vendors, suppliers, and creditors. If you can’t pay everything, talk with your attorney about your options.
6. File final payroll taxes – Businesses with employees must submit their payroll forms and pay payroll taxes after they’ve paid their employees for the last time. Talk with your attorney and accountant about filing Form 656 with the IRS to make an Offer in Compromise if you’re unable to pay your payroll taxes in full. Another option that may be worth exploring is setting up a payment installment plan by filing IRS Form 433-A.
7. Pay final state sales tax obligations – If your company collects sales tax on the products and services you sell, submit the final state sales tax forms. Then, ask your state tax agency what you must do to close your sales tax account.
8. File final income tax returns – There’s usually a final return box that needs to be checked off by LLCs and Corporations that are closing and making a final return. A tax professional can help ensure that final returns are completed correctly. Another form that applies to some businesses is Schedule K-1, for reporting shareholder allocations (and losses) for partners.
9. Cancel business licenses and permits – All licenses and permits issued by federal, state, county, and local agencies should be canceled. Otherwise, the business may still be on the hook to pay them.
10. Distribute cash and assets to business owners – After all debts, taxes, payroll, loans, and fees are paid, a business will usually have the green light to distribute the remaining money and property to the business owners. LLC owners typically get distributions proportional to their share in the business. Corporations allocate assets among their shareholders based on the number of shares they own.

For even more information, review my article Closing a Business Checklist: Ten Steps From Our Experts.

Year-End Tips for Accountants, Tax Advisors, and Business Consultants

Those of you who help entrepreneurs with the legal or financial aspects of their companies may have clients who can benefit from a business compliance checkup before this year wraps up. Below are some ideas for how you might assist them.

Help Your Clients Prevent Tax Filing Fees and Penalties

Do your clients need to catch up on filing returns or in paying any of their tax obligations for the year? Now is a good time to take stock of where they stand. If they’ve fallen behind, they must understand the sooner they catch up and become current, the fewer fees and penalties they’ll face.

Validate Your Clients Are in Good Standing

When your client is in good standing, it means that their business is legally registered with the state and authorized to conduct business there. Good standing requires following the state’s rules for conducting business in its jurisdiction (e.g., paying taxes, filing the necessary reports and other documents, obtaining the required licenses and permits, and possibly fulfilling other requirements). A state’s business filing agency (typically the Secretary of State office) can confirm or deny if a business entity is in good standing. If your client is pursuing an activity such as applying for a loan, forming a contract with another company, or setting up a credit or debit card payment processing system, they may need to request a Letter of Good Standing from the state.

Verify Your Clients Have Completed Their Annual Compliance Filings With the State

The annual business compliance filings a client must submit and pay for depend on the state and the business structure. Some common examples of annual compliance filings include:

• Annual report or biennial statement
• Annual meeting minutes
• Franchise tax
• Articles of Amendment (in the event of major changes to the company, such as an address, name, membership, or new shares)

CorpNet’s free Compliance Portal can help your clients stay on top of what filings must be completed and when they are due.

Help Clients Formally Perform Name Changes with the State

If a client wants to change the business name before the end of the year, the process and amount of time it takes to accomplish it will depend on the state and the business entity type. I’ve recently written an article with details about what’s involved in making a business name change.

Validate Your Clients Have the Proper Business Licenses and Permits in Place

Some licenses and permits expire, so it’s critical to ensure clients have renewed—or plan to renew—whatever their state requires. Operating without the proper licenses and permits is illegal. Check with the appropriate state, county, and local agencies or consider CorpNet’s Business License Service Packages to identify what clients need.

Convert Clients to the Correct Business Entity

Before the year ends is an ideal time to consider if a client’s business structure is still the right option. A business’s situation can change as it grows and evolves. Converting to a different entity type may prove advantageous for tax or liability reasons. It’s wise for your client to seek professional tax, accounting, and legal insight before deciding on a business entity change. After your clients have the expert advice they need to make an informed decision, filing the business entity conversion.

Help Clients Get Reinstated for Noncompliance or Prior Dissolution

If you have a client whose company has been placed in non-compliant status or administratively dissolved by the state, refer them to CorpNet to help them get reinstated. Reinstatement is a legal filing to officially bring an LLC or Corporation back into good standing and active compliant status.

Enroll in the CorpNet Partner Program to Help Your Clients and Open a New Revenue Stream for Your Business

The CorpNet Partner Program is cost-free to participate in, and it allows you to generate additional revenue for your company. You have two options, each providing a unique way to boost your income potential:

• Become a CorpNet Reseller – Offer our business formation and compliance services to your clients under your brand. You get wholesale pricing and then sell our services to your clients at retail rates. We do all the work as your silent fulfillment partner.
• Become a Referral Partner – Refer your clients to us for their business startup and compliance needs. You send us the business, and we send you a commission check.

CorpNet Is Here to Help You Through Every Stage of Your Business

Whether you’re a business owner closing a Corporation or LLC or a professional in an advisory role helping entrepreneurs navigate changes, everything is easier with the right resources to assist you. From formation to dissolution, my CorpNet team will ensure your filings are completed accurately and on time. Call us at 1-888-449-2638 to talk with one of our filing specialists today!

Deciding to sell a business you’ve worked hard to start and build is seldom an easy or hastily made decision, but the truth is that it happens all the time for a variety of reasons.

Why would anyone want to sell something they’ve created?

• Maybe you are a serial entrepreneur at heart and you intended to grow the company to a certain point and then sell it, so you could make a profit and move on to another venture.
• Maybe you’ve had the business for a long time and you’re ready to retire and slow down so you can travel or spend more time with family and friends.
• It could be that you and a partner no longer see eye-to-eye and agree it’s time to move on.
• Or possibly you’ve been offered a great job with an established company that offers less responsibility, greater flexibility, and a reliable paycheck.

Whatever your reason, being sure that you’re ready to sell is crucial before moving forward with the process, as it can be costly and difficult to reverse your decision.

As a serial entrepreneur myself, I know this is an important milestone and I’d like to provide some guidance on what the process is likely to entail and what you’ll need to do to make sure the transition is a smooth one for all parties involved.

1. Decide If Your Business is Ready to be Sold

Prepare an Answer for Why You’re Selling

Potential buyers will ask why the business is for sale, and it’s important that you’re able to articulate your reasons in a convincing and reassuring manner. If your business is running smoothly and you’re selling because you’re ready to retire, relocating to another area, or are planning to accept a position with another company, it’s an easy explanation.

If you want to sell because the company isn’t profitable, or worse still, you’re looking at legal problems or other serious issues, however, it’s likely that potential buyers will be few and selling the company will not be easy. Many businesses have been forced to simply go out of business because they’re unable to find someone willing to buy and take them over.

Remove Any Red Flags

Before you start the process of selling your business, take a good, hard look at whether the company is ready to be sold, and consult a business broker, attorney, tax expert, or other professional if the business is facing issues that will make it difficult to sell. It’s far better to address and solve any issues or problems before putting a business on the market than to find out no one is interested because it’s not in a good position to be sold.

Validate You’re in Compliance

If your company is structured as a C Corporation or a Limited Liability Company (LLC), you’ll need to be sure you’ve kept the business in compliance with all legal matters and have documentation ready for inspection, including Articles of Organization, operating agreement, and any certifications that show the business is in good standing with the state.

Corporations are required to hold annual shareholders and directors’ meetings and keep accurate minutes on each meeting and the decisions made. While LLCs are not necessarily legally required to have meetings and keep minutes, it’s a good practice that most LLC members embrace. Minutes from those meetings should document important decisions made by the Board or members on matters such as agreements, contracts, loans, equipment and insurance purchases, and profit sharing. Maintaining good records improves your reputation and increases your attractiveness to potential buyers.

Hopefully, the operating agreement for your C Corporation or LLC includes procedures for what happens to the business if it is sold, along with how shares and members/shareholders are to be treated.

Once you’re sure your business is in a position to attract sellers and ready to be sold, you can continue on to the next steps.

2. Determine Fair Market Value for Your Business

Figuring out how much your business is worth—a process called business valuation—can be difficult because it’s hard for an owner to be objective and look at the business the same way a prospective buyer would. It’s important to determine a selling price that’s fair to both you and prospective buyers. Overpricing the business can drive off potential buyers, while underpricing can result in missed opportunities for you.

Just as you would do if you were planning to sell a home, one of the best ways to assess the value of your business is by comparing it to similar businesses that were recently sold.

Looking at comparable sales, known as comps, can give you an idea of what buyers might be willing to pay for your business and help you estimate its value. You’ll need to be sure, however, that the businesses you’re using as comps are actually that – comps. If your business is a small coffee shop, for instance, you wouldn’t compare it to a full-scale restaurant.

While using comps is a popular way to evaluate the value of your business, it isn’t your only option. A business broker or valuation expert can help you understand other small business valuation methods, such as the adjusted net asset method, discounted cash flow method, market-based method, or capitalization of cash flow method. How you choose to determine fair market value for your business should be determined by factors such as business type, why you’re selling it, and the financial health of the company.

3. Prepare Your Financials

Certainly, one of the first steps you’ll need to take when getting ready to sell your business is to get a handle on all financial issues. A potential buyer is going to want to know everything possible about the company’s current financial situation and be able to predict its financial success for the future. To make that possible, you’ll need to have some financial documents prepared and ready for their scrutiny.

Take the time to review and clean up your financials:

• Profit and loss statement – A profit and loss statement, or P&L, is crucial because it states your company’s revenue and expenses during a given time period and establishes its ability to generate a profit. Your P&L statement will prove your company’s value to potential buyers, likely increasing the chances of an easy sale. If your company is not generating a profit, you should reconsider your decision to sell until you can turn it around to become profitable.
• Balance sheet – A balance sheet shows the value of a company’s assets, minus its liabilities and owners’ equity. It provides a snapshot of a company’s financial performance at a particular point in time and is used to determine the overall worth of the company.
• Bank statements – You should have two or three months of bank statements available for prospective buyers to review. The statements will enable them to see how much money is in your accounts, how the money moves in and out of the accounts, and any outstanding debt. Any problems with bank statements, such as unaccounted-for deposits or bounced checks might be warning signs for potential buyers.
• Up-to-date list of business assets – You’ll want to make a list of all the assets your business owns. Include tangible assets such as a warehouse or factory, vehicles, and office equipment, as well as intangible assets such as customers, intellectual property such as trademarks or patents, and the value of your business name and brand.
• Detailed list of inventory – This list establishes what items are included as part of the business and which are not. Inventory might include raw materials, office or manufacturing equipment, inventory, and furniture.
• Tax returns – Potential buyers may want to look at tax returns to make sure everything has been handled properly and there are no outstanding tax issues. Hopefully, you’ve kept good tax records and gathering the returns will be an easy task.
• Financial projections – Although financial projections aren’t a guarantee, they can give prospective buyers an idea of your company’s earning potential. Include projections for three, five, and 10 years out.

If your business’s finances aren’t good as they could be, talk to your accountant about ways to make your business look more attractive to buyers. Business buyers want to see evidence of solid cash flow on steady footing, not precarious ups and downs.

A business with no debt is almost always more appealing to potential buyers than one that is not. Even if you’re a few years away from selling, you can take steps to pay down debt. If you have investors, can you buy them out? If it makes financial sense, could you pay off the mortgage on a building or eliminate payments on business vehicles? The fewer encumbrances your business has, the more interested buyers will be. If you do have debt, look for better rates on fixed asset financing. Having debt is not a deal breaker, but it will lower your business valuation and may cause buyers to offer less than your asking price.

4. Make Improvements Where Needed

Just as when you’re getting ready to sell a home, preparing a business for sale requires that you make some improvements to ensure you can get top dollar for your company. If you’ve got a storefront, how’s your curb appeal? Even minor improvements can go a long way in making a building more attractive looking. In addition to appearance, consider the state of your technology and equipment. Buyers aren’t likely to be impressed by technology that can’t keep up or equipment that is aging and not in good repair.

Consider whether you could improve your business brand or your marketing strategy to add value to your business. Examine your online presence and consider hiring someone to help improve it if necessary. Look at your client list and work to expand it if you’re relying on only a few clients for most of your sales, something that can be a red flag for potential buyers. Assess the expertise of any employees you have and how likely it is they’ll want to remain with the company once it’s sold.

Just like a real estate agent can help you stage your house for sale, an unbiased third party can suggest ways to make your business more appealing to potential buyers. Talk to a counselor or mentor at one of the SCORE offices, Small Business Development Centers, or Small Business Administration district offices across the country to get personalized advice.  You can also search online for free webinars and guides on selling a business.

5. Market Your Business or Hire a Broker

Once you’ve done all you can to ensure that your business is ready to sell, you’ll need to decide how to market it. You can do this yourself or hire a business broker to do it for you.

Confidentiality is often a dilemma for business owners who are looking to sell. While you want to identify as many potential buyers as possible and make them aware of your listing, most owners don’t want the fact that their business is for sale to be general knowledge with the potential to scare off employees and customers. To get around that, many sellers use blind listings that offer general information about the business without disclosing its identity.

When working to identify potential buyers, consider who might have the skills and experience needed to be a successful owner. The last thing you want is to sell your business to someone who’s not qualified to keep it operating successfully. Likely buyers might include competitors, an employee, an owner of another company, a supplier within your industry, a private equity company, or a family member.

You’ll also need to decide on the channels you’ll use to spread the word about your business. These might include an internet site such as BizBuySell or BizQuest, which are platforms that lists businesses for sale, enabling potential buyers to search by industry, location, and price. Or you could post or advertise your business on a social media site such as Instagram, Twitter, or Facebook, exposing it to large segments of buyers.

Trade journals or business organizations can be effective channels for informing potential buyers about your business. Or if your buyer pool is limited, reaching out directly to prospective buyers could be a valuable strategy.

You can market and even sell your own business, but it requires a level of expertise that most people simply don’t possess. Hiring a business broker costs money, but often results in a greater number of potential buyers and ultimately, a higher sale price. A professional business broker knows how to reach potential buyers that you would not have access to and can help maintain confidentiality around the sale of your business.

Once a buyer has been identified, a broker can facilitate a faster selling process and keep the sale moving forward while you continue tending to day-to-day business.

6. Perform Due Diligence

Once you’ve received and accepted an offer for your business and settled on the terms of the sale, you’ll have to provide a due diligence clause for the buyer. Due diligence is the process of providing the buyer with any documents, data, and other information concerning the company, as requested. The buyer then has a chance to review all the information to make sure there are no problems or concerns regarding the purchase of the company.

You’ll want to have all your financial documents prepared and ready, as well as any information pertaining to legal issues. In addition, prepare any documents that reveal information about how your business is structured and operated. These would include your Articles of Organization or Articles of Incorporation, your company bylaws, lists of investors and shareholders, lists of the states in which you’re permitted to do business, and any other information pertaining to how your business is organized and how it runs.

Your prospective buyer will want to know about any partnerships you might have with other companies, what contracts you’ve entered, loan agreements, outstanding liens, letters of intent, equipment leases, or any other liabilities.

You’ll also need to provide information about customers and employees, including customer databases, purchasing and refund policies, your employee organizational chart, employee contracts, payroll and benefits information, and any other pertinent details.

Performing due diligence can be a complicated process, so make sure to leave plenty of time to get it done and consult help such as your lawyer, broker, or accountant, as needed.

7. Close on the Deal

After your buyer has reviewed due diligence and is satisfied with the findings, you can move toward closing on the sale of the business. You’ll need a purchase agreement to formalize the offer that was made and make the terms of it legal. A word of caution here . . . even if you’ve handled the marketing of your business and done the due diligence on your own, I strongly recommend that you have a qualified attorney review the purchase agreement before signing it. The sale of your business is too important to risk making mistakes.

Once the purchase agreement has been signed and all the financing finalized, your deal is complete.

8. Transfer Ownership of the Business

Once your business has been sold, you’ll need to transfer ownership to give the new owner control of business operations. Even if you’re planning to stay on for a while to help ease the transition, ownership has changed and must be legally transferred. And just a note, if you are planning to remain with the company in an advisory capacity for a limited amount of time, the details of that arrangement should be spelled out in the terms of purchase and sales agreement.

Ideally, the transfer of ownership of a business is done in an orderly manner to avoid any confusion.

Steps necessary for transferring ownership include the following:

• Close your EIN with the IRS
• File your last tax forms
• Close any business lines of credit
• Inform creditors of how bills will be paid
• Inform vendors and others of all contracts that will be assumed by the buyer
• Cancel all registrations, including licenses and permits, DBAs, and others
• Pay all remaining bills
• Distribute any assets remaining in the business
• Pay final wages to employees
• Cancel any insurance policies not assumed by the buyer
• Cancel your lease agreement if no longer applicable

You’ll also want to make sure to provide the buyer with all pertinent information, such as your client list; names of all vendors and suppliers; access information for doors, safes, computers and software; and alarm codes.

9. Submit Articles of Dissolution and Articles of Amendment

If your business is an LLC or Corporation, the business entity must be dissolved after it’s sold and Articles of Dissolution submitted to the state, along with Articles of Amendment, which revise the Articles of Organization you filed with the state when forming the business. Your operating agreement should establish the steps for dissolution of the company, but if it doesn’t, consult the default laws of your state or contact a business filing company or lawyer to assist you.

The members or owners of an LLC or Corporation must vote on the dissolution of the company, according to the terms of the company’s operating agreement or the laws of the state. Some states require a unanimous vote for dissolution, while others stipulate a simple majority.

Make sure to record minutes of the meeting during which members or owners vote, and have a formal document prepared for all to sign. Careful documentation of events is important as it prevents someone from disputing the proceedings in the future.

The Articles of Dissolution you file with the state should include the name of the company, when it was formed, when it was dissolved, and why. Filing that document signals that the company in its current form must cease regular business and hand the reins to the new owner.

Articles of Amendment must reflect the new ownership structure of the company and provide any other relevant information, such as a name change or a new registered agent. Be aware that reporting a new ownership structure of a company when submitting Articles of Amendment to the state will most likely require updating the company’s Beneficial Ownership Information Report, which is a document that names and provides information about those who own, control, and benefit from a company. Not filing the report can result in severe penalties, so be sure to properly complete that important step.

The Articles of Dissolution and Articles of Amendment are important documents that must be properly completed and filed in a timely manner, as some states have requirements for how soon they must be submitted. Your BOI report, which must be filed with the Financial Crimes Enforcement Network within 30 days of submitting Articles of Amendment, is another important document that requires careful attention. A business filing firm can assure that the forms are completed correctly and submitted on time.

Create a Smooth Transition

As you’ve no doubt gathered, selling a business is not a simple process, regardless of its size or structure. There are many steps involved and legal implications, and mistakes can easily derail the sales process or even result in legal action.

I strongly suggest you assemble a team of advisors, including a trusted attorney, CPA or tax advisor, and a business broker to guide you through the process. Professionals can help assure the sale will proceed as smoothly as possible, with all parties benefiting.