There are many reasons why small business owners decide to close their business: cash flow problems, too much competition, the economy, retirement or any other opportunity. Whatever the reason, having a thorough plan for dissolving your business is just as important as following your startup plan. Here’s an overview of what you need to know about the company’s dissolution process, sorted by legal entity, and how to wrap things up without getting yourself into trouble.
Sole proprietorship and dissolution of companies
Some business structures are less complicated to start and close. Closing a sole proprietorship or partnership is relatively easy, which is useful if you want to close a business by the end of the year.
Sole proprietors and partners in a partnership have no segregation from the business regarding legal and financial liability, so there’s not much more to do than notify customers and vendors of the closure. Still, it’s critical to have a business closure checklist to make sure all loose ends are tied up.
Ask a professional. Let your lawyer and accountant know when you want to close the business and ask what tasks need to be done to make the dissolution go smoothly.Get partner approval. In a partnership, the steps for closing the business should be outlined in the partnership agreement. Typically, all partners must agree on the dissolution and how the assets and liabilities should be divided among the partners. Also, check for state regulations regarding partnerships. Notify employees. It is critical to give employees adequate notice of the company’s dissolution so that they can plan for their future.Review contracts and agreements. Review all contracts with customers, vendors, suppliers, and creditors to ensure there are no penalties or timelines associated with terminating the contracts early. In addition, it is critical to cancel the company’s business license and permits.Pay off outstanding debts. Finally, any outstanding debts must be settled or payment arrangements made. Usually, the business owners sell the company’s assets, such as computers and equipment, to settle any debts.
The final step for sole proprietorships and partnerships is to file their final tax returns and notify the IRS to cancel the business’s federal tax number. Sole proprietors must file Schedule C (Form 1040 or Form 1040-SR), Profit or Loss from Business, with their Form 1040 for the year they dissolve the business.
A partnership must file Form 1065, U.S. Return of Partnership Income for the year in which it ceases operations and reports capital gains and losses on Schedule D (Form 1065). Filers must also check the “final return” box on the form and do the same on Schedule K-1.
Along with their forms, sole proprietorships and partnerships may need to submit the following:
Form 4797 (Sales of Business Property) if they sell or exchange real estate used in their business Form 8594 (Asset Acquisition Statement) if they sell their business to another party Schedule SE (Form 1040) if they are subject to self-employment tax
In contrast, corporations and limited liability companies (LLCs) are legal entities registered with the state in which they are incorporated. They are separate entities from the owners and will continue to exist as legal entities (with all the responsibilities associated with them) until they are formally closed with the state.
Dissolution of the company
AC Corp is a legal, taxable entity separate from its owners. Owner/shareholders are considered employees of the company and have limited liability for the debts and legal responsibilities of the company.
The state of incorporation determines how a corporation is formed and dissolved, so make sure you know your state’s requirements for corporate dissolution. The following are the typical steps taken to close a business.
Make sure the company is in “good standing”. Before a company is dissolved, the company must be in good standing, meaning it has met all of its ongoing compliance obligations – state taxes, corporate returns, etc. The state may require the company to restore its good standing before it can be dissolved .Vote for dissolution. Company statutes serve as the company’s basic rules for running the business, including how the company will be dissolved. Usually the company holds a meeting and has a formal vote to close the business. The vote must be documented in the minutes of the meeting and signed by all board members entitled to vote. If shares have been issued to shareholders, two-thirds of the voting stock must agree to close the company. Submit articles of dissolution. Once the decision to close has been made, the company must file Articles of Incorporation (also known as Certificate of Termination or Certificate of Dissolution) with the state. Usually, the dissolution form is submitted through the office of the minister.Inform creditors, suppliers and customers. Some states require businesses to notify creditors and sellers of the closing before filing articles of dissolution. In addition, some states require companies to publish a notice of dissolution in a newspaper or other publication before a certain date. Also, the company must cancel all business licenses and permits.Pay off outstanding debts. Here, too, outstanding obligations must be settled or payment arrangements made. Tax requirements. In addition to filing a final Form 1120, U.S. Corporation Income Tax Return, the company is responsible for filing and paying final payroll taxes, including Unemployment Insurance (SUT) and Income Tax (SIT). Companies must also issue final W2s to employees.sales tax. Businesses collecting and filing sales tax must file final state tax forms and payments — and local sales tax, if applicable.
After a company pays the final debts and taxes, owners can distribute the remaining money and property among the owners, according to the company’s bylaws.
An LLC is a business structure regulated by a state statute. The LLC protects its owners from personal responsibility for the debts or liabilities of the company without the formalities required in a C Corp. Owners of an LLC are called members.
Like the dissolution of a C Corp, closing an LLC requires following the steps enacted by the state in which the LLC was incorporated. Similarly, the actions follow the same path as a C Corp.
Make sure the LLC is in good standing. Have a vote with the members. Depending on state regulations and the rules set forth in the LLC business agreement, approval of dissolution may require a majority vote or unanimous consent. File LLC articles of dissolution with the state. Filing for dissolution papers should automatically cancel the legal business name in the state; however, more steps may be required to cancel a fictitious business name (aka DBA). Notify creditors, suppliers and customers. Again, business owners must determine whether notice is required before filing the articles of dissolution. Licenses and permits must also be canceled. File the LLC’s taxes. How the LLC usually files taxes determines how the LLC will file its final taxes. Pay the final wage and sales tax.
Similar to a C Corp. Once all debts are paid, the LLC may distribute any remaining assets to the members.
For most entrepreneurs, there is plenty of time to complete a business before the end of the year. As long as you follow the proper procedures prescribed by your state, you should be able to start the new year with a fresh start.
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This post What you need to know before the end of the year
was original published at “https://smallbiztrends.com/2022/11/business-dissolution-process.html”