Steps to Dissolve Your Business
- Complete the IRS closing a business checklist
- Cancel business licenses
- File a statement of abandonment for DBAs
- Notify your employees and provide final paychecks
- Pay off remaining business debt
In part one of our three-part series on business dissolutions, we explored what it means to dissolve a business. Some key points that were touched on included the importance of filing articles of dissolution. We examined the difference between voluntary and involuntary dissolution and its impact on small businesses. Then, we detailed the prep work specific entity formations, like corporations and LLCs, must do before moving forward with a formal dissolution. There’s even a highlight on how dissolving a business can be a positive aspect, and not always a negative, in entrepreneurship.
So, your business has filed its articles of dissolution with the local Secretary of State. Corporations have recorded minutes and secured an official vote with their shareholders. LLCs have also met, recorded minutes, and met a majority vote. Everyone is in agreement that it is time to dissolve the business. Your business is ready for its dissolution.
Closing A Business Checklist
A casual scroll through this IRS business checklist reminds entrepreneurs several documents must be filed before dissolving a business. Which documents should be at the top of your priority filing list?
- Annual tax returns. Form 940 must be filed for the business’ dissolution year. You may indicate your entity formation, whether that’s a limited liability company (LLC) or S Corporation, in the check box at the top of the return form. If you file taxes on a quarterly basis, you must file a final quarterly tax form (Form 941).
- Employment tax returns. Whether they worked on a part-time or full-time basis, a business that has hired employees must also file employment tax returns. The IRS Business Checklist notes that this is Form W-2 for issuing final wage and withholding information to employees. It is also advised that a statement is included with your return with the proper payroll contact information. This is the individual or payroll provider that has maintained payroll records and their address.
- Make final federal tax deposits. This may be done with the help of the IRS Electronic Federal Tax Paying System (EFTPS). You may make these federal tax payments for free online or over the phone.
- Report capital gains or losses. A list of proper forms is provided by the IRS, including Form 1040 and Form 1065, that may be filed depending on your entity formation.
- Report partner/stakeholder shares. Again, the form completed will depend on your business entity. Form 1065 is for a partner’s share of income, deductions, and credits whereas Form 1120S is for shareholders.
The full checklist of items, including these items and several others including reporting business asset sales and exchange of property, may be found on the IRS website here.
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Cancel Business Licenses
Most businesses file for business licenses in order to conduct operations. These licenses, depending on the activities of the business and its location, may be obtained through federal agencies and at the state level. Once you plan to dissolve your business, you must cancel any business licenses. Any other specific permits you’ve obtained (like a health permit or parking permit) must be cancelled as well.
File a Statement of Abandonment
Does your business also have a doing business as name, or DBA? A DBA allows your business to operate and receive payments under a fictitious name that is not its own. Before dissolving the business, you will need to file a statement of abandonment for the DBA. This form may differ slightly in name from state to state. The city of Los Angeles, for example, requires filing a statement of abandonment of use of fictitious business form. A $26 filing fee is also required as payment.
Are you unsure of the proper name of your abandonment form or how much you’ll need to pay for the filing fee? Be sure to check in with your local Secretary of State with any questions you may have about your statement of abandonment.
Notify Employees About the Dissolution
Dissolving a business, especially one that employs several employees, is often cause for unruly gossip. If one employee speculates that something is happening, they may begin to tell everyone else. A grapevine may begin to grow, filled with many incorrect “facts.”
Meet with your team members to alert them that the business is dissolving. Ideally, you should meet with the team as soon as possible. Do not wait until the final few weeks you’re still in business. Use this time to let everyone know the date their final paychecks will be distributed. Keep in mind that state laws vary for the date receiving final wages. Let’s use the state of California as an example. The CA Labor Commissioner’s Office outlines wage rules as they vary by industry, from oil drilling to motion picture production. Employers that do not pay wages by their specified timeline may need to pay penalty fees.
Be mindful that discussing a dissolution may be upsetting to some employees. Use this time to thank their team members for all of their hard work. Some entrepreneurs may meet with individuals one-on-one to discuss their future career plans. It’s a powerful gesture to help your team review and update their resumes, help connect employees with your relevant contacts, and offer yourself as a reference.
Repay Business Debt
The final step in dissolving a business is to account for any outstanding financial obligations. Repay any business debt you may still owe in full. In the event that you’re unable to repay your business debt, you may need to file for bankruptcy or find another option for acquiring funds.
Deborah Sweeney is the CEO of MyCorporation.com which provides online legal filing services for entrepreneurs and businesses, startup bundles that include corporation and LLC formation, registered agent services, DBAs, and trademark and copyright filing services. You can find MyCorporation on Twitter at @MyCorporation.