Every year in the United States, more than 627,000 new small businesses open up. These can be exciting new ventures that allow you to expand your business experience or explore a new industry!
However, not every new business will last. In fact, only around 50% of small businesses keep running for more than 5 years after their opening date. So if you are planning to say goodbye to your business and move onto pastures new, you are not alone.
No matter your reason for closing a business though it is important to handle this transition properly. As well as ceasing trading and selling off your old business assets, you need to carry out a formal dissolution. Without this, you could risk getting fined thousands of dollars in late tax fees or unpaid licenses in the future!
So how do you officially close a business? This latest step-by-step guide will ensure that you do everything you need to properly close your business with the IRS. Read on to find out more.
1. Call a Board Meeting and Communicate Clearly
Before you start the formal dissolution process, it is important to keep your colleagues and employees in the loop. You should let them know once you have absolutely decided to close your business. Ideally, you will have a final trading date to give them when you tell them.
It can be a nice touch to tell your colleagues and employees about a business closure in person, as this can be unwelcome news. Call a meeting of your chief staff members to let them know. This can also give them an opportunity to ask any questions they might have.
Then you can inform your employees at a larger meeting. Or you can delegate this to your chief staff. For example, it can be easier for managers to break the news to their teams.
To try and make this transition as smooth as possible, try to tell everyone within the same few days. That way the news won’t spread by word of mouth or create panic among your employees. Clear communication is the best way to move forward and, of course, don’t forget to thank your employees for all of their hard work!
2. File Your Final Returns and Related Forms
Paying taxes is a legal requirement in the United States, both for businesses and for self-employed individuals. According to US Tax Code 7201, attempts to evade paying taxes can result in:
- Fines of up to $100,000 for individuals or $500,000 for corporations
- A prison sentence of up to 5 years
If found guilty of tax evasion, you will also have to cover the cost of prosecution. So it is definitely worth keeping on top of your taxes and this has to cover your business right up until it ceases trading. Even if your business closes shortly after the previous tax year date and you do not trade much, you still have to file a final tax return for it.
Along with your final return, you can need to file several forms with the IRS. The forms you need depend a little on the type of business you run.
It is important to note that a limited liability company (or LLC) can be classified as a sole proprietorship, partnership, or corporation. So make sure to check your classification if you run an LLC.
Sole Proprietor Filing Requirements
If you are dissolving an LLC as a sole proprietor then you need to file a Schedule C form (either 1040 or 1040-SR) along with your individual tax return. This outlines the profit and loss from your business during that tax year.
When filing your tax return, you should also file:
- Form 8594 (Asset Acquisition Settlement) if you are selling your business
- Schedule SE (Self-Employment Tax) for earnings of $400 or over from your business
You also need to file a Form 4797 for the Sales of Business Property each year for any business property that you sell in the years after your business closes.
Partnership Filing Requirements
If you run a partnership business, you will need to file Form 1065 (Return of Partnership Income) for the year that you close your business. Along with this, you should:
- Report any capital losses or gains using Schedule D in Form 1065
- Indicate that this is your final closing return by checking the “final return” box
- Also check the box features on Schedule K-1
- File Form 4797
- File form 8594 if you have sold your business
This ensures that all of the tax paperwork for your business closure is up-to-date.
Corporation Filing Requirements
If you are dissolving a corporation then you will need to file Form 966 for Corporate Dissolution or Liquidation. On top of this, you will need to file your company’s tax return and check the “final return” box on the front page.
C Corporations also need to file:
- Form 1120 for the year that you close your business in
- Schedule D (Form 1120) to report any capital gains or losses that you’ve made
S Corporations must:
- File Form 1120-S for the year that you close your business in
- File Schedule D (Form 1120-S) to report any capital gains or losses
- Select the “final return” box on your Schedule K-1 Form
Along with this, all corporations need to file Form 4797 to report the exchange or sale of their business property. If you have sold your entire business, you will also need to file Form 8594.
3. Take Care of Your Employee Tax and Benefits Paperwork
As a business owner, you have a responsibility to take care of your employees when you close your company. This means making sure that all of your employee paperwork and financial matters are up to date.
If you have any employees in your business you must:
- Make sure that they are paid their final wages
- Pay them any compensation that they are owed
- Report your employee taxes (using Forms 941, 944, and 940)
- Make your final federal tax deposits
- Provide your employees with Form W-2
- File Form W-3 and send copy A to the Social Security Administration
- File form 8027 if your employees receive tips
When you report your employee taxes, you should also indicate that your business has now closed and give the final date for wage payments. You will also need to supply contact details for the person responsible for your company’s payroll.
Failure to properly deposit your employee income or purposeful withholding of this could result in you facing the Trust Fund Recovery Penalty. This penalty also applies to withheld Social Security and Medicare Taxes.
If you provide your employees with pension or benefits plans then you will also need to terminate these. Once you have terminated a plan you will need to distribute the assets from these plans within one year of your business closure.
4. Report Any Payments to Contract Workers
Of course, not everyone you work with in business will be a regular employee. If you have used any freelance contract workers in your final tax year, you also need to report this.
You should record any payment of $600 or more made during your business’s final calendar year using Form 1099-NEC. You will need to use one form for each contractor that you have used.
You can use Form 1096 to send paper copies of any 1099 Forms to the IRS. Or you can skip this step out by filing your 1099 Forms electronically.
5. Make Sure That You Have Paid the Tax You Owe
Once you have filed your final tax return you need to pay your taxes. Failure to do this by your given deadline could result in penalties or you may accrue interest on the tax that you owe.
In order to find out how much tax you owe, you can log into your IRS account. This will show you how much tax you have paid in previous years and what is left to pay.
If you are financially struggling following the closure of your business then you may not have to pay all of your tax in one go. Instead, you can apply to set up a payment plan that divides your tax payment over a period of months.
If you are going to settle your account in one go, there are multiple options for paying taxes. These include:
- Making a same-day bank wire (bank fees may apply)
- Posting a check or money order through the US mail
- Paying using cash via an authorized retail partner
- Using electronic funds during your e-filing
It is important that your payment arrives with the IRS in time for your tax deadline if you are going to avoid penalties. So make sure you allow time for payments made using the mail or a retail partner. These can take longer to arrive.
6. Cancel Your EIN and Close Your IRS Business Account
Once you have made your final tax payment you can set about closing your accounts. This includes closing down your IRS Business Account and canceling your employer identification number (EIN).
In order to do this, you will need to send the IRS a letter including:
- The complete legal name of your business
- Your business’s EIN
- Your business’s latest registered address
- Your reason or reasons for closing the account (namely that you are closing the business)
When you were first assigned an EIN this will have been sent to you in a notice by the IRS. If you still have your copy of this notice then you should also include this with your cancellation letter.
You can send all of these documents to the IRS at Internal Revenue Service, Cincinnati, OH 45999.
It is important to note that the IRS will not be able to close your accounts until you have completed your final tax return forms and made your final payments. So make sure that these are all up-to-date before sending your cancelation letter in.
7. Make Sure That Your Records Are Up-to-Date and Keep Hold of Them
When closing down a business, you should not immediately get rid of your business’s paperwork. In fact, it is important to file this carefully and hold onto it for a while.
This will ensure that if the IRS has any questions about your tax returns you have a copy of everything you have sent them. These records will serve as evidence of your income, tax credits, and deduction eligibility. Having your paperwork to hand is also useful if an ex-employee wants to dispute a payment with you.
Because of this, it is a good idea to keep your paperwork well-organized for each year. You should hold onto these for as long as the statute of limitations applies to them.
For example, you should:
- Hold too employee tax records for at least 4 years after your final tax payment
- Hold onto your tax returns for 3 years after the filing date or 2 years after you make your final tax payment
- Hold onto property records until the statute of limitations is up from the date that you disposed of your business property
Obviously, it is a bad idea to file a fraudulent tax return or to fail to file one at all. However, if you do this, you should hold onto your financial records indefinitely. That way, when the IRS catches up with you, you will have some paperwork to show them.
It is also worth checking whether or not your insurance company or creditors require you to hold onto paperwork for longer than the IRS does. If so, make sure you do not dispose of your records before this date!
Get Help Closing a Business Today
If you are planning on closing a business then it is important that you follow all of the official business closure steps listed here.
If you fail to properly close your business, you may still have to pay for licenses and file tax returns even if you have not been trading. Failing to do this could result in serious fines from the IRS, so make sure you put business closure on your to-do list!
Need help filing your business’s final tax return? Then check out our handy tax resources now. You’ll be on track in no time at all!