Dissolving a business can be caused by many factors; some of which are good, and some not so good. A great reason for dissolving a business is when it is thriving, and a new type of business is needed or because of a transactional sale. Other reasons include failure to file annual reports or filing taxes, bankruptcy, or voluntarily closing it. A certificate of dissolution, also known as an article of dissolution, filed with your states Secretary of State will legally end your company’s existence in its respective state of incorporation.
If a business is not fully dissolved, the tax requirements will never close, and it is technically still in operation. The potential for late fees, failure to file notices and penalties could accumulate, despite having closed your business doors for the last year or more. By following the steps outlined below, taking proactive measures to formally end your business will help end reporting obligations and keep you from paying unnecessary late fees and penalties. The documents are included in your business records will determine how long your records should be retained. A good rule of thumb is at least seven years according to the AICPA. This link provides in-depth details on the IRS website to assist with dissolving your business.
Step One: Get Approval
Company owners must approve the dissolution of a corporation or LLC. With a corporation, all shareholders must approve the action. An LLC (Limited Liability Corporation) has members who need to grant approval. Shareholders and members of a small business tend to be involved in the day-to-day operations and will know more about the situation at large. The bylaws of a corporation, or operating agreement of an LLC should outline the dissolution process and who to obtain the approvals from. To comply with the formalities of a corporation, the Board of Directors should draft an approval to dissolve the business. The shareholders will then vote on this item and will document both actions to place in the corporate record book.
Step Two: File the Certificate of Dissolution with the State
Once the votes have been cast in favor of dissolution, the paperwork must be filed with the state where the corporation or LLC was originally formed. If a company is qualified to operate in other states, dissolution paperwork must also be filed in applicable states. Filing the Certificate of Dissolution or Articles of Dissolution may vary by state. Some states will require filing documents before notifying the creditors and resolving any claims. Other states will require a tax clearance certificate for the company before the certificate of dissolution can be filed. If there are any back taxes owed by the corporation or LLC, they must be resolved first before next steps can be taken.
Step Three: File Federal, State, and Local Tax Forms
Although the business is being dissolved and the operations will be ending, that does not mean that the tax obligations immediately cease to exist. The business closing must be formalized with the IRS, and the state and local taxing agencies. The IRS website includes a helpful business closing checklist; including helpful forms and links to applicable state and local dissolution obligations. If the business has employees, additional payroll specific account closures will need to be completed to close your employer withholding and unemployment accounts.
Step Four: Closing Accounts and Obligations
Once the dissolution of the business has been approved and the correct tax forms, debts and obligations have been satisfied, the company needs to start winding down their business affairs. This could include settling debts, notifying customers, suppliers, landlords, insurers, and vendors. Employees need to be notified, all licenses, permits, and registrations need to be canceled. Once this dissolution has been approved and operations have ceased, the business will no longer be operatory or able to conduct business. Only final closing operations should be continued, including the liquidation of any assets.
Step Five: Notify Creditors of Closing
All company creditors should be notified by mail with ample information or by publicly posting in a creditable newspaper indicating their business’s intent to dissolve the business. Be sure to include an updated mailing address for any potential claims, a deadline for submitting applicable claims, and a statement that they will be barred if not received by the deadline.
Step Six: Settle Creditor’s Claims
A creditor’s claim can be accepted or rejected by the company. Any accepted claims must be paid, or arrangements made with the creditors for repayment. If there are any rejected claims, the creditors need to be advised in writing that the company has rejected the claim. Be sure to reach out to an attorney to assist and advise you on the process and related statutes.
Step Seven: Distribute Assets
After all the claims have been paid, the remaining assets may be distributed to the company owners. Assets are generally allocated according to shareholders or members based on their percentage of ownership. For example, if you own 80% of the business, you will receive 80% of the remaining assets. Any distributions must be reported to the IRS, normally on the Final Tax Return filed. If the corporation has multiple stock classes, the corporate bylaws will outline the procedure for asset disbursement to shareholders. For an LLC, disbursement procedures should be outlined in the underlying partner or operating agreement. If there are any specific questions on distributing assets, please be sure to contact your accountant, tax advisor or attorney for advice.
McKonly & Asbury has a wonderful and knowledgeable team dedicated to helping with all of your business needs. We are here to help advise you on starting your business, best practices, tax planning, tax filing, and dissolving a business when needed.
If you would like to talk to one of our professionals in our Entrepreneurial Support & Client Accounting Segment on this topic or any other business-related topic, please do not hesitate to contact us.