What You Need to Do Before You Close or Leave Your Business

What You Need to Do Before You Close or Leave Your Business

What You Need to Do Before You Close or Leave Your Business

Selling or closing a business is never an easy decision, especially for small business owners. However, if you decide that it’s the right time to leave your business, there are legal and financial steps you need to take to protect your liability. Learn how to create a business exit strategy, how to prevent business bankruptcy, and what the IRS needs before you can shut down a business in this Nav article.

When Closing a Business Is the Right Step

It can be tricky to know whether you need to shut down a business. However, if you have already explored all your options for business credit cards and small business loans and are still struggling with cash flow, it might be time.

On the other hand, you might be planning to stop focusing on one business so you can open a new venture — which means you’ll need to dissolve your old business. 

Here is a business checklist for closing down a business (but keep in mind that this varies based on your business structure):

  1. Get the owners on the same page. Make sure the majority of business owners agree to dissolve the business, and create a formal written agreement. 
  2. File articles of dissolution. For LLCs and corporations, you’ll need to send articles of dissolution to the state your business is registered in. To do this, you’ll need your business name, date of dissolution, reasons for closing, and information about upcoming legal action against your business (if that applies). 
  3. Let employees know. Give your employees a heads-up about upcoming layoffs and make sure they receive their final paychecks. Also, be sure to file employment taxes and payroll taxes and give out W-2s.
  4. File your last tax return. Complete a final income tax return for the last year the business was operating. Pay any state tax and business tax you owe for that year.
  5. Close out your EIN. If you signed up for an employer identification number (EIN), you’ll need to cancel it by following the IRS’s instructions. Whether or not you have an EIN might depend on your business entity type (sole proprietorship vs. limited liability company, for example). 
  6. Get your financial ducks in a row. Before you can close your business, it’s essential that you pay off any remaining business debts, collect accounts receivable, as well as liquidate or distribute any remaining assets. And don’t forget to close out your business bank account and cancel business licenses.

When Selling a Business Is an Option

You may prefer the idea of selling your business to a new owner rather than closing it down — like if your finances look good but you need to step away for any reason. If your business is marketable, meaning it’s profitable with a solid customer base, you’re more likely to be able to sell it. You’ll need to do quite a bit of preparation before you can sell your business, like making sure your financial records are organized and up to date, as well as determining a fair selling price and paying off any outstanding debts. 

How to Transfer Ownership

Entrepreneurs may prefer to transfer ownership of their business rather than close it down. If you want to transfer partial ownership of a business, you can do that without selling it. However, if you want to transfer complete ownership of the company to another person or entity, you’ll need to sell it. To sell an LLC, you should have created an operating agreement that detailed the steps an owner would take to transfer their portion of ownership.

Filing for Bankruptcy or Liquidation

Another option for small business owners is filing for bankruptcy, which may be helpful for a business owner in the long run if they want to keep the business running. There are three types of bankruptcy for businesses:

  • Chapter 7: Also called a “liquidation bankruptcy,” which means the business assets and business property are sold and the money made is used to pay off debts.
  • Chapter 11: Also called a “reorganization bankruptcy,” which means you work with the creditors to put together a plan so the business can pay off its bills over a specific amount of time while also staying operational. 
  • Chapter 13: This is a “reorganization bankruptcy” that only sole proprietors can use since it’s designed for individuals.

The type of bankruptcy you choose also depends on whether or not you want the business to stay open after bankruptcy, so be sure to consult with a legal professional.

Key Measures to Prevent Bankruptcy

To avoid business bankruptcy, you need to understand the full picture of your business’s financial situation. First, you’ll need to be able to quickly evaluate your cash flow, or the money coming in and going out of your business. Choosing an accounting software makes it easier to track your business’s revenue and expenses and create financial statements in an instant. Also, use Nav to see actionable cash flow insights over time so you can make effective adjustments as you go.

If you need short-term help with cash flow, there may be lenders and credit card providers that you can work with. Work with Nav to see which business funding you’re most likely to qualify for — before you apply. Funding makes it easier to cover everyday expenses or to tackle new projects you have had your eye on.

Building good business credit is another smart move since it can lead to lower interest rates and better terms, and therefore paying less to borrow money. Learn how to establish business credit in this comprehensive guide from Nav’s experts.

What a Business Owner Owes the IRS When They Shut Down Their Business

It’s important to close down your business the right way. The IRS outlines every form they need from you before your business is considered closed. These forms depend on your business type and whether or not you employ people, but the most common are your federal tax return, employment tax forms, and contract worker forms.

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