How to Close a Business in 10 Steps

Following the proper procedures when closing your business can help you avoid trouble with creditors, clients and employees.

Keep in mind that the steps involved with shutting down your business may happen simultaneously or within a short time frame, so it’s a good idea to plan for all steps before getting started and create a schedule that fits your situation.

1. Consult with all decision-makers

Sole proprietors can decide on their own to shut down a business. But if you share ownership, all partners must agree to close it. Your articles of incorporation or articles of organization — the company’s governing document, depending on your type of business — should outline the voting requirements.

The following types of businesses must hold a vote to dissolve a company:

• Corporations
• Limited liability companies
• Partnerships

Whether you need a unanimous, majority or two-thirds agreement will be stated in your business documents. Be sure to record the vote with a written agreement.

2. Notify employees and comply with labor laws

Once the decision to close your doors has been made, you will need to decide how and when to communicate this news to your employees. While some companies may want to notify their employees immediately, others may need to wait to avoid losing their employees too soon.

Businesses with 100 or more employees must adhere to federal regulations regarding employee layoffs. Any salaried or hourly employees, including managers and supervisors, are entitled to 60 days’ notice of the business closing under the U.S. Department of Labor’s Worker Adjustment and Retraining Notification Act. Exceptions to this 60-day requirement include:

• Situations where failing companies sought new capital for the business to stay open, and notifying employees would have ruined a potential deal
• Closings or layoffs that are the result of unforeseen business circumstances that didn’t provide enough time for 60-day notice
• Closings or layoffs that are the result of natural disasters

If you fail to adhere to WARN regulations, you could be liable for employees’ back pay and benefits for the period of violation, up to 60 days.

Expect to issue final paychecks on each employee’s last day, even if it doesn’t align with your typical payroll schedule. You will also need to reimburse expenses and unused vacation time.

3. Notify your customers and fulfill outstanding contracts

Depending on the size of your business, you could make a small-scale announcement or issue a news release to share your closing. Either way, your customers and clients should receive advance notice.

To avoid potential lawsuits, do your best to fulfill any outstanding jobs and contracts. If you’re unable to do so, you may need to refund payments or negotiate an early termination of projects. You may also be required to pay a fee for an incomplete job, though you could ask the customer to end the contract due to your situation.

If you have outstanding accounts receivable, try to collect payments before closing the business. It would likely be more difficult to collect bills after shutting down. After the news is out, some customers may not feel compelled to pay you.

4. Set a game plan with creditors

Your creditors need to know the date you expect to close the business and how you plan to repay outstanding debt. Here are some tips for handling the following types of creditors:

• Suppliers: Inform suppliers of the last delivery date for your business, as well as any goods that you may need to return, if possible. Create a plan to pay suppliers for goods they’ve already delivered. Some suppliers may require cash-only payments after learning your business is closing.
• Service providers: Utilities, business insurance and payroll providers will need to know the last day to administer service. You’ll also need to provide an address for the final bill. If you’ve made any deposits, you may be able to negotiate a refund.
• Landlords: Your lease should specify the number of days in advance that you must notify a landlord of your intent to vacate. If you close your business before the end of your term, you could be liable for any remaining lease payments. If that’s the case, consider negotiating a solution with your landlord. Also, discuss whether you can get any of your deposits back.
• Lenders and banks: Lenders will generally still expect you to repay your debt if you close your business. They may seize collateral that you used to secure the loan and sell those assets to recoup their loss. You’ll also need to close your business bank accounts and cancel business credit cards. Note that closing credit cards can have a negative impact on your credit score.

What to do if you can’t afford to repay your debts

If you can’t afford to repay your business debts, you’ll need to explore your options for debt resolution. In some cases, you may be able to work directly with your lender to come up with a repayment plan. In more severe cases, your business may need to file for bankruptcy, liquidating your assets to repay your creditors.

If possible, selling your business is a better alternative. Typically, the buyer will assume responsibility for any existing business debts, though you will need to specifically include this in the sale agreement.

5. File legal dissolution documents

If you registered your business as a corporation or an LLC in your state, you must legally dissolve the entity. Your state’s secretary of state office (or whatever office is responsible for corporations in your state) will require you to submit a form identifying the entity type, as well as your business debts, liabilities and the distribution of business assets.

For example, LLCs in California must file a certificate of dissolution, cancellation or surrender, depending on whether all members have agreed to dissolve. California LLCs don’t need to pay a fee for filing these forms, but be sure to check with your state to see if any fees are attached to dissolution documents.

If you conduct business in other states, you must file cancellation documents in those states as well. Failing to formally dissolve the business in all states where you operate could result in fines for unfiled annual reports or unpaid taxes. You’ll need to research the laws in your state to find out what forms are required.

6. Cancel permits, licenses and business names

Contact any agencies that issued permits or licenses to your business to cancel them. You should cancel all licenses or permits with the state or county to make sure no one else uses them and that you aren’t responsible for taxes or penalties when you no longer run the company.

Depending on your state, your DBA (doing business as) name may also need to be discontinued. For instance, business owners in Texas must file a statement of abandonment with the state’s secretary of state office or county clerk when no longer operating under an assumed name or DBA.

7. File your last federal tax returns

There are several tax-related steps to take when closing a business. The IRS offers a checklist to help you stay organized and avoid penalties. Generally, business owners must file an annual tax return for the year the company closed. Depending on the type of taxes you file, the form may include a check box to indicate that this is your final return.

You must also report employment taxes and make the final federal deposit on these taxes. When filing your last return, include a statement with the name of the person who will be keeping the payroll records for the business and where those records will be located.

The IRS will also require you to file returns to report the sale or exchange of any business property. This would include any assets you sell before closing, such as excess inventory. (We’ll discuss asset liquidation shortly.)

8. Cancel your EIN and close your IRS account

You’ll need to close your account with the IRS and discontinue your EIN when the business shuts down. Mail the IRS a letter that includes the legal name of your business, your EIN, business address and the reason you’re closing the account.

9. Liquidate business assets

You’ll likely need to convert remaining business assets, such as office equipment, furniture and tools, into cash to pay off any debts or — if you’re closing with little to no debt — to pay yourself and any partners.

Some assets may be tied up as collateral on loans or other debt, and you can’t sell those items without permission from your creditors. However, you may be able to find buyers for any unsecured assets your business fully owns, especially if you look in the right places.

For example, you might be able to sell excess inventory to suppliers and specialized equipment to competitors. You can also search for websites that specialize in auctions for your industry. Whichever route you take, keep in mind that you probably will not get more than 80% of an item’s value, and some items may sell for considerably less.

10. Keep records and paperwork

After closing your business, you’ll want to hang on to all your important documents and files, including tax and employment records. Depending on the information in your documents, the IRS recommends keeping your business paperwork for three to seven years after closing.

If you need help understanding which documents to keep, or you require assistance during any part of closing your business, hiring a business attorney or advisor could ease the process of shutting down without leaving loose ends.

Alternatives to closing your business

Before you resort to closing your doors entirely, consider these alternative solutions to keep your business afloat.

• Sell your business: Depending on the challenges your business is facing, selling your business may be a better option than closing it. If you can find a buyer, you may be able to walk away with some cash while potentially saving your employees’ jobs.
• Take on a business partner: Taking on a new business partner can bring in additional capital, expertise and connections, potentially allowing you to repay debts, finance expansions and reach new clientele. Although you’ll have to split profits with your partner, you will also be able to split responsibilities.
• Consider business financing: If your business is experiencing a temporary setback, a business loan or line of credit may be able to provide the funds you need to get through this rough patch. Just make sure you will be able to repay the loan. Otherwise, you could end up accumulating extra debt only to have to close your business anyway.