Closing a business is an incredibly emotional experience for entrepreneurs. Maybe you had your doors open for six months or two years — maybe it was several decades. Even if the reason for closing the business is positive, it can still be difficult to say goodbye. However, it’s important that you understand business dissolutions and can move forward to remain in good standing with the state.
What is a business dissolution?
A business dissolution is a formal closure of a business with the state. A small business cannot hang up a “closed” or “out of business” sign outside their storefront, turn off the lights, and lock their doors to be considered a dissolved business. Small businesses that have formed a corporation or LLC must fully terminate the existence of their business by filing articles of dissolution with the state.
Articles of Dissolution
Articles of dissolution are sometimes referred to a certificate of dissolution or certificate of cancellation. When a small business files articles of dissolution, they are officially notifying their local Secretary of State that the business is formally closed.
What happens if your corporation or LLC does not file articles of dissolution? Then the business is still considered, in the eyes of the state, to be active. This is even true of small businesses that haven’t done any business in months.
Because the company is still in existence, it must remain in compliance with the state. This means filing an annual report, paying filing fees, and paying state taxes. Again, this is all required to remain in good standing — even if you didn’t do any business. Once you have filed articles of dissolutions, the business is considered formally closed. As a result, you no longer have obligations to the state.
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Voluntary and Involuntary Dissolution
Not all businesses dissolve in the same manner. Voluntary dissolutions are generally situations where the entrepreneur decides to close the business on their own accord. The business, however, tends to be in good standing for a voluntary dissolution.
Involuntary dissolution, on the other hand, is a situation where the business has fallen into bad standing with the state. It’s possible that your business may lapse into bad standing if the following occurs:
- Neglecting to file an annual report in a timely manner
- A check for a filing fee bounced and was never replaced
- Accidentally forgetting to pay franchise taxes by their deadline
Once your small business has fallen into bad standing, it may be involuntarily dissolved by the state. This means the existence of the business has been terminated, even if you didn’t mean for it to happen. The good news is a business that is involuntarily dissolved may file for reinstatement. We’ll cover more about how that works as our business dissolution series progresses.
Preparation Before Dissolving the Business
Consider your entity before obtaining articles of dissolution and dissolving the business. There’s a little bit of preparation a corporation or LLC must go through before they can formally shut their doors.
- Corporation: You’ll need to take an official vote before moving forward with the business dissolution. This means scheduling a meeting with the board of directors and taking and recording minutes. The dissolution must be approved by the majority of shareholders. If the vote does not pass, your business does not secure the shareholder vote and cannot be dissolved. However, if enough shareholders vote to dissolve the business you may move forward with your plans. If your business happens to be a public corporation, keep in mind that many states require these corporations to create a dissolution proposal. This is a formal announcement that the corporation intends to dissolve. An additional statement is included that the majority vote agreed to the proposal, which is made part of public record.
- LLC: It’s a slightly similar situation for this entity as well. Members of the LLC must meet, take and record minutes, and have a formal vote. If the majority vote is met, the LLC may dissolve the business. Remember to document the dissolution in the LLC operating agreement, too.
How to Formally Close a Business
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.
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.
How to Reinstate Your Business
Reinstatement brings a business back to where it was before it fell out of compliance. Once a company has been dissolved, whether that was on a voluntary or involuntary basis, the business is considered no longer active. However, filing for a reinstatement helps restore the company back to active status with the state. Not only does reinstating a business allow the company to open its doors for business again, but it also puts it back in good standing.
Why Reinstate a Business?
As mentioned in part one of this series, some businesses don’t need a reinstatement. They might have run their course, or the owner is interested in pursuing other ventures. However, for those businesses that fall into bad standing with the state and are involuntarily dissolved, a reinstatement provides the company with a second chance. The owner acknowledges the mistake made that led to their business dissolution, whether it was filing an annual report late or a bounced check for a filing fee. The mistake won’t be made again, and the reinstatement provides another chance to succeed in business.
What’s the Best Time to Reinstate a Business?
MyCorporation’s general advice has always been to reinstate a dissolved business as quickly as possible. Some states, such as Georgia, even have a time limit for reinstatements. If a Georgia corporation or LLC has been dissolved, then the reinstatement filing must be done within the next five years.
Reinstatement Filing Tips
Certain aspects of reinstatement filing generally remain the same. Previously dissolved entities file an application for reinstatement and pay a filing fee. However, reinstatement varies depending on the state, entity, and even the method you choose to reinstate a business. While this guide does not cover all 50 of the U.S. states, it gives us insight into the rules for reinstatement throughout various states.
Let’s use Utah’s Secretary of State as an example. LLCs, limited partnerships, and limited liability limited partnerships may all use an online business reinstatement portal to reinstate their businesses. However, domestic corporations may not be reinstated online and require paperwork form submissions. Before filing to reinstate a business, make sure to check in with the local Secretary of State to ensure you are following the proper reinstatement instructions as per your entity formation.
The state of Vermont, for example, provides an online business service center to reinstate a business online. Additionally, the state offers the ability to file for reinstatement by mail. If you wanted to reinstate a business in Tennessee, however, you would have even more filing options. Applications for reinstatement may be e-filed, printed and mailed in, and even walked in to the Tennessee Secretary of State’s office. Check in with your local Secretary of State to see what filing options are available and choose the method that works best for you.
Did you know that if you want to reinstate your LLC or corporation in Montana you need to obtain a Title 15 Tax Certificate? This document is proof to the state that all taxes imposed to Title 15 have been paid in full. Carefully review any additional paperwork your business may need to be reinstated by the Secretary of State.
These also vary across states, from moderate to slightly expensive fees. Utah has a $70 filing fee while the state of New York’s reinstatement filing fee is $55. What’s the filing fee for dissolved corporations and LLCs in Georgia? $250. Unfortunately, there is no flat fee across all 50 states to pay when reinstating your business. It’s advisable to calculate your filing fee with the help of your local Secretary of State.
Payment of Additional Fees
Do you still owe tax or penalty fees for the dissolved business? Remember that these taxes and fees must be paid in full before filing to reinstate. If your business has any outstanding returns, these must be filed as well.
Domestic Entities vs Foreign Entities
While most states accept the reinstatement of domestic entities, foreign entities may need to follow specific rules. Reach out to your Secretary of State for additional guidelines.
Can I Get Help with My Reinstatement?
Absolutely! Third-party organizations, like MyCorporation, are here to assist you. We can help complete your reinstatement application, figure out what fees you need to pay to the state, and submit the paperwork on your behalf. We’ll keep you updated as you wait on the status of your reinstatement and make sure you’re the first to know when the business is back up and running again.
Can business dissolutions be a positive part of the entrepreneurial journey?
It’s easy to see dissolving a business as a bittersweet moment in your startup journey. The great idea you worked so hard to build is now closing its doors. If anything, you’re probably flashing back to memories of your “greatest hits” in business.
Consider the keyword in that sentence: build. It may be dissolved, but you built this business from the ground up. You brought a dream into reality. That took courage, faith, and a lot of hard work. Dissolving a business is actually an incredibly positive part of your entrepreneurial journey. After all, you brought one business into the world successfully. What other ideas do you have up your sleeve? Maybe it’s time to start a business based on those ventures. You know you can do it!
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.