You help your clients manage their business finances and scale up to the next level. But it’s just as important to help them close a business that’s no longer active.
Dissolving a business as expediently as possible is important to avoid extra fees and paperwork. With the end of the year approaching, it’s wise to shut down any inactive business now to avoid having to pay fees for 2017.
If you’re not certain about what’s required to legally dissolve a business, here are seven steps for closing a business with the IRS, state and local entities:
1. Hold a vote to dissolve the business. If the business was operating as a corporation, the members or shareholders need to approve the formal dissolution of the business. The first step is to hold a meeting to vote on shutting down the business; the final vote needs to be recorded in the meeting minutes.
• For corporations: Two-thirds of the voting shares need to agree to close the business. If shares were never issued, then the corporation’s board of directors needs to agree.
• For LLCs: Specific rules vary by state and can be found in the state’s LLCA (Limited Liability Company Act). Or, if your client specified a dissolution procedure in their operating agreement, they’ll need to follow that procedure.
2. File Articles of Dissolution paperwork with the state. After the members, shareholders or board of directors vote to dissolve the business, the LLC or corporation will need to file an Articles of Dissolution or Certificate of Termination with the Secretary of State’s office wherever the LLC or corporation was formed. An online filing service can assist you with this form to ensure everything is filled out properly for smooth processing.
In addition, if your clients filed a foreign qualification to operate in another state, they’ll also need to close these foreign qualifications. To do so, they’ll need to file paperwork (e.g. Certificate of Surrender of Right to Transact Intrastate Business) with that state’s secretary of state office.
3. Settle all debts. Before your client can distribute assets among partners or shareholders and put money in their own pocket, they need to settle any outstanding business debts. If your client’s business owes any vendors, those accounts need to be settled and paid.
4. Collect accounts receivable. Your client should work to collect on any past due invoices before announcing they’ll be shutting down the business. It will be much harder to collect after it’s known the business will close. If necessary, an effective strategy is to offer a discount on a bill in order to collect as much as possible.
5. File the final tax return. When a business closes, it needs to notify the IRS. For LLCs and corporations, this is typically done by checking “final return” on the final tax form. In addition, the business will need to report shareholder allocations and losses for partners on Schedule K-1. LLCs must do this by April 15 the year after closing; corporations have two months and 15 days after closing to file.
Don’t worry about the EIN. Just like you don’t actually close a Social Security number, the IRS never really cancels an EIN. The EIN will always belong to the business entity. But your client can close their account with the IRS by writing a letter.
6. Close all business permits and licenses. Another important step toward dissolving a business is to notify the local business authorities and cancel any business permits. If your client doesn’t cancel these licenses, they’ll still be expected to pay any associated fees.
7. Distribute the remaining assets. After taxes, debts and final payrolls have been paid, the business distributes the remaining money and assets among the business owners. LLCs distribute money and assets to members according to everyone’s proportional ownership share. Corporations distribute money and assets to shareholders based on the number of shares owned.
By following these seven steps, your client can properly dissolve a business in the eyes of the state and IRS. If your clients have already moved on from the business, they should close it out before the end of the year to avoid having to pay unnecessary fees in 2017.
Nellie Akalp is a passionate entrepreneur, small business advocate and mother of four. As CEO of CorpNet.com, a legal document preparation filing service, Nellie helps entrepreneurs start a business, incorporate, form an LLC, set up sole proprietorships and DBAs, and maintain a business in compliance with state filing requirements for a new or existing business.
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