Did You Close Your Business The Right Way? How To Be Sure You’re Legally Covered

Updated for 2022

Starting a business is exciting. Having to close your business, on the other hand, can be an emotional ordeal.

As an accountant and coach, I hate to see anyone’s dream business close down. However, things happen in business, just like in life. 

Maybe you’ve lost the passion for what you do. Or your goals have changed. Perhaps you decide to go in a different direction altogether. 

So there are many reasons why businesses call it quits. Not all are necessarily unfortunate! Sometimes a fresh start with something new is what you need.

Many business owners don’t know the proper legal steps to close up shop, so let’s make sure you’re covered.

I’ve seen many serial entrepreneurs continually open and close businesses, not knowing the legal ramifications. It’s easy to see how this happens, too.

Entrepreneurs sometimes get this false sense of knowing what to do when it comes to setting up their businesses. And let’s face it. Not too many of us ever really learned anything about setting up a business. So you can’t know what you never learned, right? 

But closing down business without taking the proper steps can create severe headaches.

When you decide you’re done, it’s about more than flipping the sign to “closed” for good and just walking away. This applies whether your business is brick-and-mortar or virtual.

What are some of the most common misconceptions people have about starting up and shutting down businesses?

Here is one example. People often apply for an EIN (Employee Identification Number) without knowing the rules and regulations. The problem comes in when you decide to change your type of business entity, or start up a new one altogether.

Different rules apply for each different business entity you set up, whether you set up an LLC, an LLC filing as an S Corp, Non-Profit, or a Partnership. Each entity type all require different tax forms and have different tax deadlines. There are also various regulations for each of them if you want to keep your status.

Two of my clients recently had a shock in that regard. I realized that they had inadvertently set up a partnership status (not a husband and wife team) for their business. This status change moved the tax filing deadline from April 15 to March 15. It also required more complicated tax forms with triple the time and money investment.

I also had two clients who signed up for an S Corp to get the tax benefits. However, they failed to meet the minimum requirements to sustain this new status. They weren’t even able to reap the tax savings.

Now they’re stuck with a higher invoice from their CPA without any of the S Corp benefits they signed up for. (Find out more about whether you’re ready to make the S Corp leap right HERE!)

Another common scenario is the mistaken notion that you can re-use an old EIN for a new business. People also often assume that you can run multiple businesses through the same EIN.

But you may not re-use an old EIN for a new business, nor can you run multiple businesses through one EIN.

(This rule doesn’t include a DBA “Doing Business As” name if it’s for the same product/industry and branding purposes.)

When you close a business, the EIN goes with it. When you change business entities (which is similar to closing one business and opening another), the EIN and tax rules change as well.

Many of my clients weren’t aware of this, and it ended up causing major headaches when tax time rolled around.

Here’s the take-home message:

• If you closed a business this year without shutting it down completely (entity and all), now is the time to get your house back in order.
• If you’re planning to walk away from a business any time soon, know how to shut things down properly.
• Finally, if you’re planning to start a new business, know that you can’t “recycle” your old business entity or EIN

It’s helpful to consult with your CPA or accountant if any of the above applies to you. They can help you get your legal ducks in a row, so you don’t have to deal with crazy tax surprises down the road.

So now that we’ve talked about why it’s so important to close up shop properly, only one question remains.

How DO you close your business?

Glad you asked!

For starters, here’s a video from the IRS on some of the basics. It includes resources and checklists to help guide you through the steps. (Who knew the IRS was so tech-savvy?) 😉

Check out that video HERE: https://www.irsvideos.gov/SmallBusinessTaxpayer/ChangingYourBusiness/ClosingBusiness

Now, here’s my quick summary of the business shut-down steps that might apply to you:

1. Notify your accountant in an email. Include the closing date, the steps you’ve already taken, and any advice they can offer. Also, ensure all that they have filed all the forms from their standpoint.

2. Dissolve any assets. Have inventory? Be sure you get rid of it via flash sales, donations, etc. Have a company car? Be sure to do a proper transfer for personal use or sale.

3. Get your money in order. Collect any accounts receivable (money owed to you) and pay any accounts payable. (money owed to others for services). Then pay off any business loans or debts. Make sure that all your money is collected and paid before you close your business accounts. (It would be rough if you had to file another tax return for some collected income in a new year, right?)

4. Let your customers and contractors know. Of course, you’ll want to complete any promised work to clients before closing your business. You’ll also want to inform any contractors you work with. Make contact with customers and contractors as needed. Be professional in your business relationships, and notify everyone before you move on.

5. Take Care Of Payroll. Even if you are on an owner’s salary as an S -CORP, this counts as payroll. You’ll still need to file W2s for the year wages were paid. If you have outside employees, be sure to help them with the transition. Give them ample time to look for a new job, get their reimbursement forms in, and get their final paychecks ASAP.

6. Pay off Your Payroll Taxes. Pay any final tax deposits and check off “final” with the last payroll date on the 941/940. Do the same for any state payroll deposits. I’d also write a letter to the state payroll dept and keep a copy, just for good measure. If you don’t properly close your accounts, you’ll likely get “hate” letters asking about payroll taxes on historically assumed salaries. That means you’ll have to spend a lot of time back-explaining you closed the company 1, 5, 7, or however many years ago.

7. Settle Up Your Sales Tax: Similar to payroll taxes, pay your final sales tax payment and write “FINAL” on the form with the date. Follow up with a written letter (and keep a copy), or you might get similar “hate” mail from your state.

8. 1099s: Yes, just like W2’s, you’ll still need to file 1099s for work performed in the final year.

9. File your final tax return. Here’s a breakdown of how that applies to different business entities.

• Sole proprietors: There is no final return checkbox on the Schedule C. You’ll need to file your return by April 15 the year after you close. (Example file Schedule C by 4/15/2023 for the 2022 tax year)
• Partnerships and LLCs: When filing form 1065, check the “final return” box. You’ll also need to report profits and losses distributed to each partner on Schedule K-1 of form 1065. Do this by April 15 the year after your business closes.
• Corporations (including S Corps): When filing form 1120S, Check the box indicating that this is your final return. Also, report shareholder allocations on Schedule K-1. You’ll need to dissolve your corporation by filing Form 966. These forms need to be filed no later than two months and 15 days after you close your business.

10. Let the IRS know about your EIN. Write to the IRS and let them know which EIN associated business has closed. You can keep the EIN as yours, but let them know it’s inactive.

11. Dissolve your entity with your state. Based on your entity type (LLC, S CORP, Non-Profit etc) you will need to locate the form specific to the type and state you are in. There may be a fee for this so be sure to use any company cash for this process. If you simply do not renew your annual report in some states that will automatically dissolve your company as well.

12. Keep your paperwork. Don’t throw out your paperwork with your business. File it away safely and keep for at least seven years.

13. Cash Distributions. Once you’ve done all the above (settled up debts, taxes, paid employees, sold off all assets, etc.) distribute any cash that remains. If you are a sole proprietor, the money will be a draw to the owner. For Partnerships, distribute cash-based what’s equal to their capital account. For Corporations, distribute to shareholders based on the number of shares. (If you are the only shareholder, all will go to you).

14. Close any accounts in the company name. Close any bank accounts, credit cards, loans paid off. Also discontinue any business licenses, subscriptions, or utilities in the company name. 

Whew! Sounds like a lot, doesn’t it? Honestly, it isn’t as overwhelming as it sounds.

Closing a business can be an emotional experience, but it doesn’t have to turn into a legal nightmare. Take it one step at a time, enlist help if you need it, and you’ll be good to go.

So, are you looking to close a business, or have you done so recently? Leave any questions that I didn’t cover here, and I’ll answer them as best as I can!

Until Next Time,

Love, Light, and MONEY, Honey…

Kaylee