8 steps to winding up your business by the end of the year

By Nellie Akalp

Entrepreneurs have faced more than their fair share of challenges in recent years, and 2022 has been no exception, with inflation rising and consumer spending falling. Unfortunately, some business owners have decided to close their businesses due to economic difficulties. Others may wish to cease operations for other reasons, e.g. B. from retirement. Regardless of why someone decides to close their business, it’s important to recognize that the process involves more than just ceasing to sell products and services. There are additional requirements to legally end a company’s existence.

What a business owner needs to do depends on the type of business structure (e.g. sole proprietorship, partnership, limited liability company, C corporation), where the business is located, whether it has employees, and other factors. As you can imagine, there are both legal and financial considerations to be made, so the advice of a reputable and reliable solicitor, accountant and tax adviser can help ensure that everything runs smoothly and no important tasks are missed.

The following is an overview of the tasks that can arise when a business closes. If things are to be neat and tidy by the end of the calendar year, business owners will need to get their affairs in order sooner rather than later.

An 8-point checklist for winding up a business

1. Check the company’s governance documents for procedures to follow

Different business structures have different internal governance documents that contain provisions for handling company matters. One of the situations they usually bring up is what happens when the company dissolves.

For example, a corporation’s articles of incorporation may require the organizers to hold a meeting, conduct a formal shareholder vote, and obtain the approval of a specified majority of shareholders.

The internal agreements of companies, such as articles of incorporation, articles of association and operating agreements of limited liability companies, usually specify what must happen in order to authorize the company’s dissolution.

2. Make sure the business entity has a good reputation

Before a business entity is dissolved or retired in a state, the company must be in good standing having fulfilled all of its ongoing compliance responsibilities (e.g. more).

When a company has lost its reputation, it must do whatever the state requires to rebuild it before it can be wound up. This may include tax returns, filing certain reports, applying for reinstatement, or other actions.

3. Submit resolution article

LLCs and corporations must file articles of dissolution (some states call it a certificate of termination or certificate of dissolution) to officially dissolve the business entity with the state.

An LLC or corporation’s legal business name (those in its articles of incorporation or bylaws) will be automatically deleted when the dissolution becomes effective. Any corporation (including sole proprietorships and partnerships) that has used a fictitious company name (DBA) must clear that name with the state or local agency that approved it.

If a foreign company is qualified to do business in states other than its home state, it must also notify those states that it will cease doing business there. The required procedures and documentation may vary by state; generally, it involves filing a revocation request and paying the associated filing fee.

4. Notify external stakeholders

It is good manners, and sometimes required by law, for a business to notify creditors, vendors, and customers of the closure. Some states require corporations to post a notice of dissolution in a newspaper or other publication. This ensures that anyone who may be owed money or who has outstanding transactions with the company is aware of its closure.

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5. Make final tax returns and close tax accounts

Most businesses have federal, state, and local tax responsibilities. The rules and procedures for handling final tax obligations vary by jurisdiction. A company (and/or its owners) may remain responsible for federal, state, and local income and payroll tax obligations until it closes its tax accounts with the federal, state, and local tax authorities.

Here is some general information about what businesses typically need to do before closing their tax accounts. However, as things could get complicated, it is advisable for business owners to speak to their accountant or tax advisor for guidance.

Payroll taxes and other employment-related tax obligations. Any company with employees that makes State Unemployment Insurance (SUI or SUTA) and State Income Tax (SIT) payroll tax payments and deductions must file their final payroll forms and pay payroll taxes after issuing their final payments to their employees. At the federal level, an employer must make final federal tax contributions and report payroll taxes (including federal income tax withholdings, FICA and FUTA). Also, the company must issue each employee with a Form W-2, a payroll and tax return, reflecting wages and salaries for the year. If the company paid $600 or more to independent contractors in its most recent year, it must also issue 1099-NEC (Nonemployee Compensation) to those individuals. Depending on the type of business and other factors, business owners may also need to fill out other forms and filings.

Value added tax. Businesses that have collected sales tax on products and services must submit their final sales tax forms and payments to the state (or local) tax authorities.

income tax. Businesses must file their final income tax returns and make any payments due. The IRS lists the requirements and forms to use for each entity type:

To cancel the company’s Employer Identification Number (EIN) and close its IRS business account, owners must send the IRS a letter that includes:

  • Full legal name of the company
  • A
  • business address
  • Why the account is closed

6. Terminate Business Licenses and Permissions

Many businesses require one or more licenses and permits to legally operate in their state or local jurisdiction. Business owners should notify any licensing authority that the business is dissolving and request that licenses and permits be revoked.

7. Sort assets and debts

A business may have physical assets (furniture, real estate, office equipment, etc.) and inventory that it can sell to generate cash before closing operations. It can also have intangible assets (e.g. patents, trademarks, copyrights, customer lists) that can bring in some funds.

These funds could prove useful to pay off any outstanding company debts that need to be settled with creditors, vendors, and suppliers before the company is wound up. When a business does not have the funds to pay its debts, owners may need the help of an attorney to understand and comply with state claims laws.

After the debts are paid off, the remaining assets are usually divided among the owners of the company according to the terms of their internal governing documents (e.g. memorandum of association, LLC operating agreement, articles of incorporation).

8. Keep business records

Even years after a business has closed, questions or problems may arise regarding accounting, taxes, and other matters. It’s important for business owners to keep records in a safe place in the event of a legal investigation or tax audit. In general, seven years is a reasonable retention period for tax records and other information – the longer the better. The IRS website contains the statute of limitations for certain tax circumstances.

Consequences of an improper business closure

Failing to take necessary steps to shut down a business can result in business owners remaining responsible for compliance duties and fees. Therefore, it is important to understand and follow all requirements.

I’ve covered many potential liabilities, but there may be others depending on the type of business, business activities, state and local laws, and other considerations. The guidance of trusted professionals such as a lawyer, accountant and accountant can help entrepreneurs overcome the uncertainties and come up with a plan to wind up their business by the desired date without leaving loose ends.

About the author

Nellie Akalp is a passionate entrepreneur, economist, professional speaker, author and mother of four. She is the founder and CEO of CorpNet.coma trusted resource and service provider for corporate formation, LLC filing, and corporate compliance services in all 50 states.

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