December 10, 2014 Financial Management en_US Closing a business involves more than closing the doors ? no matter its size. How to close a business: A 10-step guide for small business owners
Financial Management

How to close a business: A 10-step guide for small business owners

By Suzanne Kearns December 10, 2014

Surviving as a small business owner is challenging. According to the Small Business Administration’s Office of Advocacy, only 33% of businesses last for a decade or longer. If you’ve determined it’s time to close your business, you may think you can just close your doors and walk away without ever looking back.

However, business closings are a bit more complicated than that, and there’s some legal paperwork you need to complete before ceasing business operations. If business owners simply walk away without fulfilling legal requirements, they can be exposed to lawsuits, loss of personal and business reputations, and unnecessary fees.

Today, we’re providing a ten-step business checklist to help shut down your start-up. Following these steps will ensure you close down your business the right way.

Step 1: Create an exit strategy

The decision to close a business is not something you should do unilaterally. If you own a partnership or limited liability company, you should consult with other owners. If you own a corporation, consult with your board of directors. Most times, you can’t close a business without their consent anyway. Work with your business’s other stakeholders to formulate an exit strategy and map out the best way to shut down the business.

Additionally, consider getting help from outside sources. This can include:

  • Lawyers
  • Bankers and accountants
  • Tax professionals
  • The IRS

Formulating a plan before officially deciding to cease operations will help you get through the closure process more smoothly.

Step 2: Notify employees

You’ll need to use your best judgment when telling your employees about your decision to close. You can either tell them at the last possible moment to avoid having them quit, or you can give them ample warning so they can line up another job. As you’ll see below, completing some tasks, like selling off all your assets, could be difficult if your employees are unaware of what’s going on. Part of your strategy should be determining how to handle employees.

You won’t have as much discretion when it comes to issuing employees their last paychecks, as each state dictates this. In addition to issuing final paychecks, be sure to reimburse your employees for any out-of-pocket expenses they incurred and collect company property, including cell phones, cars and computers.

Step 3: Collect outstanding accounts receivable or sell them to a factor

If you have outstanding accounts receivable, you’ll need to implement an aggressive collections strategy. Once you shut down your business, it will be practically impossible to collect your accounts receivable. Other business owners will be less inclined to pay. And, their accounting practices may not allow them to do so since they would have to pay an individual instead of a legal entity. Upon closing your business, you no longer have legal standing to collect.

Additionally, collecting your outstanding accounts will give you cash on hand, which will be helpful as you prepare to close. To improve your efforts, take these steps:

  • Make collection attempts before you announce you’re going out of business. Otherwise, customers may feel as though they don’t have to pay you, or they’ll try to stall payment until after you’ve closed your doors.
  • Offer discounts for immediate payment, especially if you’re dealing with aging receivables. You can increase the discounts as the time of your closure approaches. Sometimes, it’s better to collect some funds than none at all.
  • Instead of just sending collection letters, which the recipient can easily ignore, try calling the customer or visiting them in person to ask for payment.
  • For the accounts you can’t collect, consider selling them to a factor. Factoring agencies purchase your unpaid invoices at a discounted rate, which at least puts some cash in your pocket. You won’t recoup the total amount that’s owed, but you’ll at least receive a percentage of the invoice.

Step 4: Sell all business assets

If you have excess inventory, now is the time to sell it. This can provide you with the cash necessary to pay any debts you may owe. Begin by having a big sale and heavily discounting the products. Once you announce to your customers and employees that you’re closing the business, you can hold a “Going Out of Business” sale and discount the products even more.

Consider selling remaining inventory online on sites like eBay, Amazon, Craigslist and If you have a warehouse full of stock, talk to an inventory liquidator like American Merchandise Liquidators. These companies buy excess inventory for a percentage of its worth, or help sell it through their own channels.

Step 5: File articles of dissolution

Now that you have a more precise look at your finances, you should file articles of dissolution. You’ll need to submit articles of dissolution in every state where you’ve registered to conduct business. You can do so with each respective Secretary of State’s office. The actual paperwork will vary from state to state, but it tends to be rather straightforward. You can typically e-file or send a hard copy.

Step 6: File other relevant paperwork

There are likely other business accounts that you’ll want to shut down. Examples include licenses, registrations, permits and business names. Remember that you may need to file paperwork outside of the Secretary of State’s office to fulfill these obligations. You may need to do this at the local, state and federal levels.

You’ll also need to close credit cards and bank accounts, but make sure you’re done collecting or making payments before doing so. The same goes for any rent or utilities you’re paying. You don’t want to do this too soon, but make sure you don’t forget to do it either.

Step 7: Inform your customers and complete jobs in progress

You’ll need to inform your customers that you intend to close your business. If you own a large company, you can issue a press release. If your business is smaller, simply publish a statement in the local paper. You’ll also need to address your outstanding jobs to avoid lawsuits for unfulfilled contracts.

Try to first fulfill all outstanding jobs. If you can’t meet them, you should refund the money paid on those jobs. Communication is critical during this time. It’s better to be upfront and honest with customers than try to “pull one over” on them.

If you can’t fulfill the job obligations, you may need to negotiate for early termination. Some contracts include a cancellation provision that requires you to pay a fee if you can’t complete the project. If it’s within your means, pay it to ensure you won’t be sued. If the price is excessive or you’re unable to pay, call the customer, explain your situation and ask them to end the contract.

Step 8: Notify creditors and pay outstanding debts

You’ll need to inform your creditors that you’re closing your doors and pay any outstanding debts. Laws govern how you should do this. There are also laws dictating when creditors can sue you for unpaid claims. They usually have to wait a set amount of time after you notify them of your closure.

Some states also require you to publish a notice in a newspaper announcing your business closure. Here are some general guidelines to keep in mind about notifying certain creditors:

  • You’ll want to inform unsecured creditors and suppliers right before you close. Try to time this notification just right so you can continue to receive the inventory and supplies you need up until the moment you close your doors.
  • Those with bank loans need to proceed with caution. In some cases, as soon as you inform your bank that you’re going out of business, it can call your note due or even deduct your balance from your business bank account. Keep this in mind when considering when to let them know of your plans.
  • Sole proprietorships and partnerships should send a letter to creditors telling them you’re closing and asking for a final bill. Your creditors will have a certain amount of time to file a claim against you for unpaid debts. The exact amount of time depends on your state’s statute of limitations.
  • LLCs and corporations also need to send a notification letter to creditors that contains specific information. Determine your state’s rules about when creditors must submit their claims and include this information in the letter, along with a statement saying that if they miss the deadline, their request will be barred. The timeline varies by state, and you’ll find it in your state’s Limited Liability Company Act or the Business Corporations Act. offers a good starting point to find this information.

Step 9: Submit final payroll forms and complete taxes

After you pay employees for the last time, you’ll need to file the federal and state employment tax forms and make the business tax deposits just as you always have, according to the regular schedule.

If you’re short of cash, you can file an Offer in Compromise with the IRS by filling out Form 656 and asking that the amount you owe be reduced. If you file for bankruptcy, you won’t be eligible for this program, as the bankruptcy typically wipes away your tax debt. If you want to apply for an installment plan, fill out IRS Form 433-A.

Next, you’ll need to submit your state sales tax forms, along with the amount of taxes you collected up to the date of closing. Write “FINAL” across the top of the form and then talk to your state agency about how to close your tax account.

Depending on how your business is set up, the IRS has specific requirements for filing final income tax returns.

  • Sole proprietors: There is no “final return” box to check on the Schedule C. Instead, just file your return by April 15 the year after you close.
  • Partnerships and LLCs: When filing IRS Form 1065, check the “Final Return” box. You’ll also need to report profits and losses that have been distributed to each partner on Schedule K-1 of Form 1065. Do this by April 15, the year after your business closes.
  • Corporations: Check the box indicating that this is your final return when filing Form 1120, and report shareholder allocations on Schedule K-1. You’ll also need to dissolve your corporation by submitting Form 966. You’ll need to file these forms no later than two months and 15 days after you close your business.

Lastly, you’ll need to file your final employer tax returns if you had employees or independent contractors working for you. You’ll need to file Form 941 or 944— depending on whether you’re required to register quarterly or annually—along with your last federal unemployment tax return. File these forms, along with the accompanying payments, by their regular due dates, and mark them final.

You’ll need to issue W-2s to your employees and report the withholding information to the IRS. Issue 1099-MISC forms to your independent contractors and report that information to the IRS as well.

Step 10: Distribute remaining cash or assets to all owners

Once you’ve paid all debts, taxes, employees and loans, you can distribute the remaining funds to owners. You should not do so until you’re positive that you’ve paid off all business debts.

Closing your business properly will save you future trouble

No matter the reason for closing your business, you need to make sure you do so the right way. It may be tempting to go “off the grid” and cease communications when closing your company, ignoring all business-related matters.

However, this is not in your best interest. Choosing this strategy could expose you to liability, penalties and fees. Taking the correct steps to dissolve your business legally, while tying up loose ends, will help reduce future headaches.

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Suzanne has been a full-time freelance writer for 20 years. She’s written for numerous business and financial publications such as Entrepreneur, Reason Magazine, Home Business Magazine, and Money Crashers. Read more