Unfortunately, the pandemic has caused many businesses to fail. Yelp reported 60% of businesses that had closed at the start of the pandemic are not reopening. What’s more, in some cases, businesses may be viable, but owners just want to give up.
Important Tips for Closing Your Business
Whether by necessity or choice, owners need to take certain actions to shut down properly and avoid problems. Here are some actions to consider.
If you are incorporated or have a limited liability company, shutting your doors doesn’t end your legal status. You must dissolve the entity by following state law rules, which usually means filing articles of dissolution with your secretary of state. State law may require a vote by owners to dissolve the business. You won’t receive any state approval until all outstanding taxes (e.g., unemployment taxes) have been paid.
If you have a lease, you can just vacate the premises; the obligation to pay rent continues through the term of the lease. Most small business owners have co-signed their business leases, putting them personally on the hook for the balance of the lease term. However, you can work with your landlord to minimize your financial exposure and get out of lease.
If you have assets, sell them to raise the cash needed to pay employees and outstanding debts. Consider selling inventory to a remainder company that buys in bulk. “Fire sales” of other assets—display cases, restaurant equipment, furniture, may be necessary.
Be sure all your obligations to employees have been met. This includes paying final paychecks. When filing IRS Form 941 for the quarter in which final paychecks were issued, be sure to note that it is your final form (answer question 17 to indicate that your business has closed and attach a statement to your return as required). Remember that owners (“responsible persons”) generally remain liable for unpaid “trust fund taxes” (employees’ income tax withholding and FICA). However, there is a business installment available (sole proprietors use the payment plan for individuals).
Be sure all required taxes have been deposited. Remember to issue W-2 forms to employees for the final year.
Retirement plans. When you close a business, its retirement plan is terminated. Participants become 100% vested in all accrued benefits, which must be distributed to them. This means, for example, that if you have a 401(k) plan, employees are entitled to receive their contributions, plus all employer contributions and earnings on the account. Special termination rules apply to defined benefit (pension) plans. The IRS has FAQs on plan terminations.
State unemployment division. You need to deactivate your state unemployment account. Contact your state unemployment office for details.
The IRS has created a landing page for closing a business. It lists the steps to take, including filing a final return (and final Schedule K-1s for partners and S corporation shareholders) and canceling your employer identification number (EIN). The page has special details for:
- Sole proprietorships
- Corporations (C and S)
It’s advisable to work with a CPA or other tax professional to make sure do things properly.
Owners need to unwind all of the indices of a business. For example, close a business bank account once all outstanding bills and other obligations have been paid. You may need to keep the account open during the time of winding up the business as additional costs may arise.
Other actions to take:
- Cancel business credit cards
- Cancel business insurance policies. You may be entitled to some refunds of premiums paid.
- Cancel licenses, permits, and registrations
- Notify customers and suppliers
- Take down websites and social media placements
Loans—lines of credit, credit card debt, commercial loans—outstanding need to be addressed. In many cases, owners have given their personal guarantees, so even if the business shuts down they remain personally liable for the balance of the loan. Work with lenders to see if balances can be reduced or loan terms changed (e.g., more time to pay).
While your current business may have failed, the entrepreneurial spirit that got you started in the first place is likely still burning inside you. Richard Branson said: “There will be lots of downs. Do your best to fight tooth and nail to survive. And if you don’t survive, if you have worked damn hard, don’t get down about it. There’s a lot of successful entrepreneurs who have picked themselves up and started again.” Take your time and get back in the game.