What is the type of business termination in which the firms legal or financial obligations are not fully met at closing?

For some small business owners, the time comes when they must end operations and dissolve their business. It’s a stressful time and a multi-step process. To facilitate the process, here are seven common steps to closing a business.

What does dissolution of a business mean?

Business dissolution can be caused in many ways, including the failure to file annual reports or pay certain taxes in the state of incorporation, bankruptcy, or voluntary dissolution by business owners.

You voluntarily dissolve your business by filing Articles of Dissolution, which legally ends your company’s existence in your state of incorporation — or in your state of qualification, if you had registered to transact business in another state.

What happens if you don’t dissolve your business?

Businesses incorporated or foreign-qualified in a state face annual report and taxation requirements in that state. Unless the state knows your business is no longer in existence, those obligations will continue. Typically, late fees and penalties will continue to accumulate. Dissolving your business with the state will end these obligations.

Step 1: Get approval of the owners of the corporation or LLC

Company owners must approve the dissolution of a corporation or LLC. With corporations, the shareholders must approve the action. With limited liability companies (LLCs), members grant approval.

For small businesses, shareholders or members are often involved in day-to-day operations and typically know the circumstances. The bylaws of a corporation or the LLC operating agreement typically outline the dissolution process and needed approvals.

To comply with corporation formalities, the board of directors should draft and approve the resolution to dissolve. Shareholders then vote on the director-approved resolution. Both actions should be documented and placed in the corporate record book.

While LLCs are not subject to the same formalities, documenting the decision and member approval is recommended.

Step 2: File the Certificate of Dissolution with the state

After shareholders or members have voted for the dissolution of the business, paperwork must be filed with the state in which the corporation or LLC was formed. If the company qualified to transact business in other states, paperwork must be filed in those states, too.

• The process for filing the Certificate of Dissolution (also called Articles of Dissolution) varies by state. Some states require filing documents before notifying creditors and resolving claims. Others require filing after that process.
• Certain states require tax clearance for the company before the Certificate of Dissolution can be filed. In these cases, any back taxes owed by the corporation or LLC must first be paid.
• Contact your online incorporator, registered agent, or Secretary of State's office to learn more.

Step 3: File federal, state, and local tax forms

Although you’re ending operations, your tax obligations do not immediately cease. You must formalize the business closing with the IRS as well as your state and local taxing agencies. The IRS website includes a business closing checklist, which indicates the required forms and links to additional state and local requirements.

Remember payroll reporting obligations if you have employees. Be sure to consult your accountant or tax adviser on your particular requirements.

Step 4: Wind up affairs

After the dissolution is approved, the corporation or LLC must wind up its affairs. Actions during this period include:

• Settling debts
• Notifying customers, suppliers, landlords, insurers, and vendors
• Notifying employees
• Canceling licenses, permits, and registrations
• Withdrawing from states where foreign qualified

Can a dissolved business still operate?

A dissolved business can’t operate or conduct business other than that which is necessary to wind up its affairs and liquidate its assets.

Step 5: Notify creditors your business is closing

You must notify all of your company's creditors by mail, and explain:

• That your corporation or LLC has been dissolved or has filed the statement of intent to dissolve
• The mailing address to which creditors must send their claim(s)
• A list of the information that should be included in the claim
• The deadline for submitting claims (often 120 days from the date of the notice)
• A statement that claims will be barred if not received by the deadline

Your state may allow for claims from creditors that are not known to the company at the time of dissolution. You may be required to place a notice in the local paper about your company's dissolution. When in doubt, ask an attorney about what your state mandates.

Step 6: Settle creditors' claims

Creditor claims can be accepted or rejected by your company. Accepted claims must be paid or satisfactory arrangements made with creditors for repayment. For example, a creditor may agree to settle the claim for less (such as 80%) than the original amount.

With rejected claims, you must advise creditors in writing that your company rejects their claims. Be sure to have an attorney assist and advise you about the process and your state's related statutes.

Step 7: Distribute remaining assets

After paying claims, the remaining assets may be distributed to company owners. Assets are generally allocated according to the shareholders’ or members’ percentage of ownership. For example, if you own 80% of the business and your brother owns 20%, you receive 80% of the remaining assets.

Distributions must be reported to the IRS. If your corporation has multiple stock classes, corporate bylaws typically outline the procedure for distributing assets to these shareholders. For an LLC, the procedure should be outlined in the operating agreement. For details on distribution and your ongoing contingent liabilities, contact an accountant or tax adviser.

A note about “canceling” your EIN (employee identification number)

A common misconception about EIN is that you can simply cancel or close it when dissolving a business. The IRS cannot cancel your EIN. Once an EIN has been assigned to your business, it becomes the permanent federal taxpayer identification number for that business.

Regardless of whether you ever used the EIN to file federal tax returns, the EIN is never reused or reassigned to another business entity. The EIN will still belong to the business entity and can be used at a later date, should the need arise.

Let BizFilings, help you dissolve your LLC or corporation. Learn more about our business dissolution service.