How to Close a Business
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Following the proper procedures when shutting down a company could help you avoid trouble with creditors, clients and employees. When you become an entrepreneur, learning how to close a business is not on your mind. Whether your business is failing or you want to step away, shutting down may be the right choice if selling isn’t an option.
How to close a business in 7 steps
These steps may come at various times as you figure out how to shut down your business. Some may happen simultaneously or within a short time frame, so think about your particular business as you come up with a plan.
- Decide to officially close the business
- Notify employees and comply with labor laws
- Notify your customers and fulfill outstanding contracts
- Set a game plan with creditors
- File legal dissolution documents
- Cancel permits, licenses and business names
- File your last federal tax returns
1. Decide to officially close the business
Sole proprietors can decide on their own to shut down a business. But if you share ownership, all partners must agree to close it. Your articles of incorporation or articles of organization — the company’s governing document, depending on your type of business — should outline the voting requirements.
The following types of businesses must hold a vote to dissolve a company:
- Limited liability companies
Whether you need a unanimous, majority or two-thirds agreement would be stated in your business documents. Be sure to record the vote to close with a written consent form or meeting minutes.
Arnold Dunn, a SCORE business mentor in Chapel Hill, N.C., recently convinced his two business partners to agree to shut Longstreet, their New York-based children’s apparel company that had seen declining success in the wake of growing e-commerce retailers such as Amazon.
The two partners split to create separate apparel businesses — one for boys and one for girls — transferring licenses and high-quality inventory from Longstreet to the two new companies. Dunn, ready to retire and relocate after 20 years with the business, kept Longstreet’s less valuable inventory, accounts receivables and payables, bank debt and building lease, then proceeded to close.
“I knew the outcome was going to be positive,” he said.
2. Notify employees and comply with labor laws
Businesses with 100 or more employees must adhere to federal regulations regarding employee layoffs. Any salaried or hourly employees, including managers and supervisors, are entitled to 60 days’ notice of the business closing under the U.S. Department of Labor’s Worker Adjustment and Retraining Notification Act. Exceptions to the 60-day requirement include:
- Situations where failing companies sought new capital or business to stay open, so notifying employees would ruin the deal
- Closings or layoffs that are the result of unforeseen business circumstances that didn’t provide enough time for 60-day notice
- Closings or layoffs that are the result of natural disasters
If you fail to adhere to WARN regulations, you could be liable for employees’ back pay and benefits for the period of violation, up to 60 days.
Expect to issue final paychecks on each employee’s last day, even if it doesn’t align with your payroll schedule. You would also need to reimburse expenses and unused vacation time.
Notification could come elsewhere in the process of shutting down a company, depending on your business. It may be crucial for some companies to notify employees immediately, while others may need to wait to avoid losing employees too soon.
Most of Longstreet’s employees followed one of the two business partners to their new companies, Dunn said. He kept a skeleton crew to handle accounting, information technology (IT), accounts payable and orders in the warehouse.
“In our situation, we had it pretty easy,” Dunn said.
3. Notify your customers and fulfill outstanding contracts
Depending on the size of your business, you could issue a news release to share your closing or make a small-scale announcement. Either way, your customers and clients should receive advance notice.
To avoid potential lawsuits, be sure to fulfill any outstanding jobs. If you’re unable to do so, you may need to refund payments or negotiate an early termination of projects. You may be required to pay a fee for an incomplete job, but you could ask the customer to end the contract based on your situation.
If you have outstanding accounts receivable, try to collect payments before closing the business. It would likely be more difficult to collect bills after shutting down. After the news is out, some customers may not feel compelled to pay you, Dunn said.
“To the extent that we’re talking about receivables with large customers like big-name companies, you’ll get paid,” Dunn said. “When you’re talking about selling to small chains, mom and pop stores all around the country, you definitely run that risk.”
4. Set a game plan with creditors
Your creditors would need to know the date you expect to close the business and how you plan to repay outstanding debt. Here are some tips for handling the following types of creditors:
- Suppliers: Inform suppliers of the last delivery date for your business, as well as any goods that you may need to return, if possible. Create a plan to pay suppliers for goods they’ve already delivered. Some suppliers could begin requiring cash-only payments after learning your business is closing.
- Service providers: Utilities, business insurance and payroll providers would need to know the last day to administer service. You’d also need to provide an address for the final bill. If you’ve made any deposits, you may be able to negotiate a refund.
- Landlords: Your lease should specify the number of days in advance that you must notify a landlord of your intent to vacate. You could be liable for any remaining lease payments if you close your business before the end of your term. If that’s the case, consider negotiating a solution with your landlord. Also, discuss whether you’d get any deposits back.
- Lenders and banks: Lenders would still expect you to repay debt if you close your business. They may seize collateral that you used to secure the loan and sell those assets to recoup their loss. You’d also need to close your business bank accounts and cancel business credit cards. However, closing credit cards would likely have a negative impact on your credit score.
When Dunn’s business partners created their own companies, they bought their respective Longstreet inventory at cost with their own funds. Dunn used that money to pay off bank debt the business had accrued. From there, he bought his way out of the building lease.
If there’s a lender in the picture when closing your business, “you need to be in constant communication and contact with the lender to keep the lender calm and comfortable,” Dunn said. Assure creditors you’ll have sufficient funds to repay them when all is said and done.
“Now that the bank is off your back, every dollar you get is going in your pocket,” Dunn said. “That’s a very important concept for people to understand.”
5. File legal dissolution documents
If you registered your business as a corporation or an LLC in your state, you must legally dissolve the entity. Your state’s secretary of state office would require you to submit a form identifying the entity type, as well as your business debts, liabilities and the distribution of business assets.
For example, LLCs in California must file a certificate of dissolution or a certificate of cancellation, depending on whether all members have agreed to dissolve. California LLCs don’t need to pay a fee for filing these forms, but be sure to check with your state to see if any fees are attached to dissolution documents.
If you conduct business in other states, you must file cancellation documents in those states as well. Failing to formally dissolve the business in all states where you operate could result in fines for unfiled annual reports or unpaid taxes.
Dunn has yet to officially dissolve Longstreet’s corporate entity. He said he must keep the entity open in case the company receives funds from a former customer’s bankruptcy settlement. If not for the bankruptcy case, dissolving the entity would be a crucial step in the process of shutting down.
6. Cancel permits, licenses and business names
Contact any agencies that issued permits or licenses to your business to cancel them. You should cancel all licenses or permits with the state or county to make sure no one else uses them and that you aren’t responsible for taxes or penalties when you no longer run the company.
A dba (doing business as) name must also be discontinued. For instance, business owners in Texas must file a statement of abandonment with the state’s secretary of state office or county clerk when no longer operating under an assumed name or dba. Dunn’s company operated under the name Stretch-O-Rama Inc. dba Longstreet.
7. File your last federal tax returns
There are several tax-related steps to take when closing a business. The IRS offers a checklist to help you stay organized and avoid penalties. Generally, business owners must file an annual return for the year the company closed. The return provides check boxes on the front page allowing you to indicate the year your business ceased to exist.
You must also file final employment tax returns and make the last federal deposits of these taxes. When filing your last return, include a statement with the name of the person who will be keeping the payroll records for the business and where those records will be located.
The IRS would require you to file returns to report the sale or exchange of any business property. This would include any assets you sell before closing, such as excess inventory. (We’ll discuss asset liquidation shortly.)
In some instances, you may want to dissolve your entity after filing your final tax return, Dunn said. States sometimes require evidence that the business is closing — a copy of the front page of your final tax return would be strong proof.
Final tasks when shutting down a business
As you’re handling the major aspects of closing a business, here are some miscellaneous tasks to keep in mind.
Close your IRS account
After you first receive an Employer Identification Number from the IRS, it will be associated with your business entity. You can close your account with the IRS and discontinue your EIN when the business shuts down. Mail the IRS a letter that includes the legal name of your business, your EIN, business address and reason you’re closing the account. You can send the letter to:
Internal Revenue Service
Cincinnati, Ohio 45999
Liquidate business assets
You would need to convert your remaining business assets, such as office equipment, furniture and tools, into cash to pay off debt or keep for yourself and your partners. Some assets may be tied up as collateral on loans or other debt, and you can’t sell those items without permission from creditors. But you could find a buyer for any unsecured asset that your business fully owns. However, you might not be able to get more than 80% of an item’s value.
It took Dunn about 11 months to unload Longstreet’s $6 million to $7 million in remaining merchandise, receiving 50 to 60 cents on the dollar.
“Children’s clothing is not like fine wine,” he said.
But Dunn was able to pay all accounts payable as well as employees — and about $4.5 million was distributed to the business owners.
“That’s an orderly liquidation,” he said. “In the end, everybody got paid.”
Keep records and paperwork
After closing your business, hang on to all documents and files, including tax and employment records. Consider keeping your business paperwork for three to seven years after closing.
If you need assistance during any part of closing your business, hiring a business attorney or advisor could ease the process of shutting down without leaving loose ends. Despite any disappointment you may feel, as Dunn’s business partners did, closing could have a positive resolution.
“I think now they see it probably worked out for the best,” Dunn said. “The retail industry has massively changed, there’s no question about it. The business was very, very good to me for many years. I had a great career. I had a great time.”