Opening a business requires a lot of time and effort. Months, if not years, are dedicated to planning for opening day and beyond, and for those entering that journey, there are a variety of resources available to help them as they navigate their entrepreneurial path. But what if you need to close up shop?
Making the decision to dissolve your business isn’t always easy, nor is it cloaked in the same glamour that accompanies opening efforts, but that doesn’t mean it’s a process that doesn’t require thorough planning. If you’ve made the decision to permanently close your doors, and you want to do it the right way, there are a few things you need to keep in mind.
1. Communicate With Your Employees
Notifying your employees will be difficult, and the exact time to let them know varies. Some employers may opt to let them know as late in the process as possible, for fear that the employees will leave far before the doors close. However, others may opt to provide their employees with adequate notice that allows them to find alternative work and prepare their family.
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Empathy aside, letting your employees know can also make it easier for you to carry out some of the obvious and necessary closing procedures, such as liquidating inventory or closing out client accounts. They will also be able to field any questions that clients or customer have during the final days or weeks.
When you do let your employees know, it’s helpful to include some high-level information about to why the business is closing, when the last day will occur, and what changes will need to be made to the current day-to-day tasks.
2. Settle Financial or Product/Service Obligations
Once you determine that you’re going to close your doors, it’s time to plan for the financial obligations that will follow. These obligations fall into three distinct categories: employee, client/customer obligations, and business accounts.
Employees: Even though you’re closing your doors, you are still responsible for compensating employees. However, when that payment needs to be in the hands (or account) of your employees may vary by state.
Some states will require payment at termination, while others allow for adherence to the typical pay cycle. Be sure to consult your state’s labor laws for information on final payment requirements.
Clients/Customers: Some businesses, like retail stores or restaurants, may not owe their customers much aside from a parting message and a closed-for-business sign.
However, if you own a B2B or B2C that schedules work or services, requires payment upfront, or temporarily has custody of customer property (i.e., laptop or phone repairs), you will need to properly close out accounts, return any funds or property, and complete any existing work orders (or refund them if work cannot be completed and payments were made). Failure to do this can turn into costly legal battles.
Business Accounts: Before officially closing for business, you will need to close out business or creditor accounts, including vendor, supplier, and utility accounts, as well as bank accounts.
But before you hop on the phone and spread the word, take time to thoroughly plan your closing needs; in this case, time is of the essence. If, for example, you need inventory for the next three months, you’ll likely want to wait to cancel that account. Similarly, bank loans may be “callable”, meaning your lender, upon learning of your intentions, can choose to call your loan, requiring you to pay the remaining balance in full.
3. Submit Necessary Tax Forms
Finally, and perhaps more importantly, you will need to take the appropriate steps to officially close your business in the eyes of the government. According to the IRS, if you’re closing your business, you will need to complete the following steps:
- Make your final federal tax payments.
- File a final employment tax form (quarterly or annually as required). This includes Form 940, 941, 943, and 943-A as required.
- Issue your final wage and withholding information to your employees
- If your employees earn tips as part of their income, file Form 8027.
- Report any capital gains or losses by submitting Forms 1040 (individual tax return), Form 1065 (partnership return) and Form 1120 (capital gains and losses).
- If you have partners or shareholders, report those shares by submitting Forms 1065 and Form 1120S, as required.
- If your employees received pension or benefits, file a Form 5500.
- If you work with sub-contractors or freelancers, issue payment information through Form 1099-MISC and report that information via Form 1096.
- Report your corporate dissolution or liquidation by submitting Form 966, and report your business asset sales via Form 8594.
- Finally, report the sale or exchange of any business or trade specific property by submitting Form 4797.
Keep in mind that these forms are specific to small business, and should act as guidance. However, to make sure you’ve met all tax obligations, seek guidance from a tax professional, consult the IRS and the Secretary of State’s office to work through all requirements as you close the “entity” you started. Failure to do this can turn a seemingly small oversight into a fairly hefty financial setback, which can represent a dire financial blow to a closing business.
Closing a business isn’t as simple as locking up the doors and turning off the lights. To do it properly, maintaining integrity and adhering to the law, there are several steps you will need to follow and considerations you will need to make. However, by creating and following a thorough action plan, you can close your business on an honest and positive note.
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