As difficult it may be to make the decision to close a business, things can become even more challenging if a business’s owners don’t tie up all the loose ends. If you’re thinking of closing your corporation by year-end, realize that there’s more to the process than halting the sale of products and services. Merely stopping business activities doesn’t officially close a company, there are steps that must be taken to legally end the business entity’s existence.
The exact actions a corporation’s owners must take will depend on where the business is located, whether it has employees, whether it issues shares of stock to its shareholders and other factors. Because things can get complicated legally and financially, it’s important for a corporation’s leadership to research everything that will be involved and get guidance from a trusted attorney, accountant, and tax advisor.
What to Do When Dissolving a Corporation
If any necessary steps get missed when permanently shutting down a corporation, it could mean its owners will remain responsible for the ongoing business compliance tasks, filings, and fees such as annual reports, tax returns, business license and permit renewals, and more. A state will continue to expect a corporation and its owners to comply with all of its legal requirements until the company has been dissolved officially.
Different states have different rules for ending a business entity’s existence, and a corporation’s bylaws should lay out details for how closing the business should be executed. While the specifics and the order of tasks may vary (that’s why I can’t emphasize enough the importance of talking with legal and tax professionals!), often, the general steps involved are similar.
1. Ensure the Business Entity Is in Good Standing
Before dissolving or withdrawing a corporation from the states where it conducts business, the business entity must be in good standing in those jurisdictions. That means it will have had to keep up with all its ongoing compliance obligations. For example, some states require tax clearance (verification that all taxes have been paid) before a corporation may file to dissolve the business entity. Other business compliance responsibilities that corporations must stay current with to stay in good standing include annual report filings, holding shareholder and board of director meetings, and renewing business licenses.
If a corporation has failed to fulfill its obligations, it must do whatever the state requires to restore a status of good standing (which might involve filing for reinstatement) before it can be dissolved.
2. Hold a Vote to Gain Consensus
Typically, a corporation must hold a meeting and conduct a formal vote to initiate closing the business. The proceedings should be captured in the meeting’s minutes. If a corporation has issued shares of stock to shareholders, two-thirds of the voting shares must agree on closing the business. If shares haven’t been issued, then the usual rule is that the board of directors must vote on closing the company. Regardless of who is responsible for voting, the corporation’s secretary should capture the final vote in the meeting minutes.
3. File Articles of Dissolution
Corporations must file Articles of Dissolution (which alternatively might be called Certificate of Termination or Certificate of Dissolution) with the state. This filing is usually done through the Secretary of State office, although it might be a different agency depending on the state. It’s crucial to make sure Articles of Dissolution are completed accurately so that the business may close without delays or issues.
If a corporation was foreign qualified in other states so that it could conduct business there, it will not have to file Articles of Dissolution in those states but it will have to notify the states of its withdrawal to cancel any registrations, permits, licenses, and business names it obtained in those jurisdictions. Withdrawing a foreign business typically includes filing a withdrawal application and paying a filing fee.
Dissolution of a corporation is typically considered effective on the date specified during the shareholder or board vote, but the business may continue to wind up its affairs (i.e., until it has liquidated and distributed its assets). Some states allow businesses to specify an effective dissolution date up to 180 days in the future, however, they do not allow backdating a dissolution.
4. Notify Creditors, Vendors, and Customers
Some states may require that businesses notify creditors and vendors of the upcoming closure before they file their Articles of Dissolution with the state. Also, some states require that corporations publish notice of their dissolution in a newspaper or other publication within a certain period after the effective date of their articles of dissolution. Doing so ensures that the public and anyone the company owes money is aware of the business’s impending closing. That will allow those parties to identify any outstanding debt the company owes them and ensure it is resolved before the business closes.
Besides the fact that it’s common courtesy to let customers know that a business will no longer exist, it’s also beneficial to the corporation if it has outstanding accounts receivable it wants to collect when winding down the company’s affairs.
5. Cancel Business Licenses and Permits
A corporation that has obtained licenses and permits to conduct business should inform the appropriate licensing agencies that it will be dissolving.
Filing dissolution paperwork automatically cancels a corporation’s legal business name in the state. However, if a corporation had registered a DBA (fictitious business name), it may have to cancel that name separately.
6. File Final Payroll Taxes
Businesses with employees who previously registered for payroll taxes (SUI and SIT) must submit their payroll forms and pay payroll taxes after paying their workers for the last time. Options, such as an installment plan or “offer in compromise” (approval to pay less than the full amount owed to settle the tax debt), exist for companies that have run into financial difficulties and cannot pay taxes in full.
Corporations must also issue a Form W-2, Wage and Tax Statement, to each of their employees for the calendar year during which they make pay final wages and salaries. Likewise, they must issue Form 1099-NEC, Nonemployee Compensation to independent contractors to whom they’ve paid at least $600 in the year they’re closing the business.
7. Pay Final Sales Tax
If a company collects sales tax on the products and services it sells, it must submit its final state (and local, if applicable) sales tax forms and payments. It can then close its sales tax accounts per the agency’s instructions.
8. File Final Income Tax Returns and Close Accounts
Regarding federal income tax for the tax year when a corporation ceases to exist, filers must select the “final return” box on their tax return. The business may have to file other IRS forms as well depending on its circumstances (e.g., if the business is being sold). The IRS website provides a checklist of the forms and information required. A corporation’s (and its shareholders’) federal, state, and local income and employment tax obligations may continue until the business closes its tax accounts with the IRS and state and local tax agencies. The IRS requests that business owners send a letter to close their IRS business account. The information required is the entity’s complete legal name, the EIN, principal business address, and reason for closing the account. A corporation must file any outstanding taxes and tax returns before the IRS will close an account.
It’s helpful for business owners to talk with a tax professional for guidance on what must be done at the state and local levels when filing final returns and closing accounts with those tax agencies. The rules and process may vary depending on the jurisdiction.
9. Sell the Company’s Assets
Liquidating and selling assets and inventory can help generate cash before a corporation closes its doors. This can be especially beneficial when a business’s bank accounts will not have sufficient funds to cover outstanding debts and creditor claims. For physical assets (like property, equipment, and furniture), a qualified appraiser can help establish the liquidation value. Business owners should also consider their intangible assets. For example:
- Trade name
- Licensing agreements
- Customer lists
Intangible assets may be in demand and sold to another business. It can be helpful to talk with an intellectual property attorney to work through determining the value of the assets and transferring their ownership.
10. Pay Outstanding Business Debts
Winding down a business also entails paying off debts to vendors, suppliers, and creditors. If funds are not adequate for settling all money owed, it may be possible to agree on payment in a lesser amount. It’s highly advisable to enlist the help of an attorney to navigate the state’s laws regarding settling claims.
11. Distribute Remaining Cash and Assets
After a company has paid all its final taxes, payroll, debts, and fees, it may usually commence with dividing its remaining money and property to its owners. For a corporation, this usually involves allocating assets among its shareholders based on the number of shares that they own. The corporation’s bylaws will (hopefully!) detail how everything is divided among the company’s owners.
12. Retain Business Records
Because questions about a business’s taxes, financials, employment records, etc. may arise years after it has closed, it’s important to retain records in a safe place. In the event of an IRS audit or legal investigation, having records readily available can alleviate a lot of work and stress.
The IRS offers some guidance on how long business owners should keep records. Typically, seven years is recognized as a prudent amount of time. Better safe than sorry!
Where to Get Expert Filing Assistance
The ideal time to dissolve a business can vary depending on the situation but tackling closing tasks before the end of the year may help avoid additional compliance fees and tax obligations in the upcoming year.
With CorpNet’s help, you can have peace of mind that your dissolution paperwork and other state filings are completed accurately and quickly. We work with business owners in all 50 states and have a thorough understanding of the paperwork involved in each of those states.
Contact us today to discuss how we can help you wrap up your business successfully and seamlessly!