December 10, 2014 Financial Management en_US Closing a business involves more than closing the doors ? no matter its size. A 10-Step Checklist for Closing a Business
Financial Management

A 10-Step Checklist for Closing a Business

By Suzanne Kearns December 10, 2014

Closing a business involves more than closing the doors — no matter its size. If business owners simply walk away, they can be exposed to lawsuits, loss of personal and business reputations, and unnecessary fees. Here’s a 10-step checklist to help you close down your business the right way.

Step 1: 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. To improve your efforts, take these steps:

  • Make collection attempts before you announce that you’re going out of business or some customers may think they don’t have to pay you what they owe.
  • For aging receivables, offer discounts for immediate payment. You can increase the discounts as the time for your closure approaches.
  • Instead of just sending collection letters, which can be easily ignored, email and call the customers and personally ask for payment.
  • For the accounts that you cannot collect, consider selling them to a factor. You won’t recoup the amount that’s owed, but will get a percentage of the invoice.

Step 2: 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 business, you can issue a press release, and if your business is smaller, simply publish a statement in the local paper.

In addition to issuing the statement, you’ll need to address your outstanding jobs and contracts to avoid lawsuits for unfulfilled contracts.

  • Fulfill all outstanding jobs. If you can’t fulfill them, you should refund the money paid on those jobs so far. If you don’t have the funds, begin communications with clients to work out a payment plan.
  • If you have outstanding contracts with customers, you’ll need to either fulfill them or negotiate for an early termination. Some contracts include a cancellation provision which requires you to pay a fee if you can’t complete the project. If it’s within your means, pay it to ensure that you won’t be sued. If the fee is excessive or you’re unable to pay, call the customer, explain your situation, and ask them to end the contract.

Step 3: Sell all Inventory and Assets

If you have excess inventory, now is the time to sell it. 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. For your remaining inventory, sell it online at sites like eBay, Amazon, Craigslist, and If you have a warehouse full of inventory, talk to an inventory liquidator like Genco or Excess Technologies. These companies buy excess inventory directly for a percentage of their worth or help sell it through their own channels.

Step 4: Notify Creditors and Pay Outstanding Debts

You’ll need to inform your creditors that you’re closing your doors and then pay any outstanding debts. There are laws that govern how you should do this, along with rules about how long after you notify them they can sue you for unpaid claims (see links below).

Here are some general guidelines to keep in mind about notifying certain creditors.

  • Unsecured creditors and suppliers: Try to time this notification just right so that you can continue to receive the inventory and supplies you need up until the moment you close your doors. Inform them just before you close, and ask for a final bill.
  • Bank loans: In some cases, as soon as you inform your bank that you are 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: You should send a letter to your creditors telling them that you are closing and ask for a final bill. In addition, to ensure that you reach any creditors that you are unaware of (or have forgotten about), issue a statement in the local newspaper. Your creditors will have a certain amount of time to file a claim against you for unpaid debts, depending on your state’s statute of limitations.
  • LLCs and corporations: You’ll also need to send a notification letter to your creditors that contains certain information. Determine your state’s rules about when creditors must submit their claims by and include this information in the letter, along with a statement that if they miss the deadline, their claim will be barred. The timeline varies by state and you’ll find it in your state’s Limited Liability Company Act or the Business Corporation Act. offers a good starting point to find this information. You’ll also need to publish the notification in your local newspaper for unknown creditors.

Step 5: Notify and Pay 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 give them ample warning so they can line up another job. You won’t have as much discretion when it comes to issuing their last paychecks as this is dictated by your state. Nolo offers a state-by-state chart with each one’s requirements. In addition to issuing final paychecks, be sure to reimburse your employees for any out-of-pocket expenses they incurred and collect company property such as cell phones, cars, and computers.

Step 6: Submit Final Payroll Forms and Make Deposits

After you’ve issued the last employee paychecks, you’ll need to file the federal and state employment tax forms and make the deposits just as you always have according to the regular schedule. If you are short of cash you can file an Offer in Compromise with the IRS by filing out Form 656 [PDF] and asking that the amount you owe be reduced. If you file for bankruptcy, you won’t be eligible for this program. If you want to apply for an installment plan, fill out IRS Form 433-A [PDF].

Step 7: Submit Final Sales Tax Form and Pay What’s Owed

Next, you’ll need to submit your state sales tax forms, along with the amount of taxes that 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.

Step 8: File Final Income Tax Return

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

  • Sole proprietors: There is no “final return” box to check on the Schedule C [PDF]. Instead, just file your return by April 15 the year after you close.
  • Partnerships and LLCs: When filing IRS Form 1065 [PDF], 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 [PDF], and report shareholder allocations on Schedule K-1. In addition, you’ll need to dissolve your corporation by filing Form 966 [PDF]. These forms will need to be filed no later than two months and 15 days after you close your business.

Step 9: File Final Employer Tax Returns

You’ll need to file your final employer tax returns if you had employees or independent contractors working for you, or if you were the only employee of the business. You’ll need to file Form 941 [PDF] or 944 [PDF], depending on whether you’re required to file quarterly or annually, along with your last federal unemployment tax return using form 940 [PDF] or 940-EZ [PDF]. File these forms, along with the accompanying payments, by their regular due dates and mark them as final.

You’ll need to issue W-2s to your employees and then report the withholding information to the IRS on Form W-3 [PDF]. Issue 1099-MISC forms to your independent contractors and report that information to the IRS using Form 1096 [PDF].

Step 10: Distribute Remaining Cash or Assets to All Owners

Once you’ve paid all debts, taxes, employees and loans, the remaining money can be distributed to the owners.

  • Sole proprietorship: All monies that are left over after paying what’s owed goes directly to the owner.
  • Partnerships and LLCs: If there is enough money left, pay each partner an amount equal to what’s in their capital account. If there isn’t enough left to do that, distribute the money based on the size of each partner’s capital account.
  • Corporations: Divide up the remaining cash among the shareholders according to the amount of shares they hold.

Finally, don’t forget to tie up all other loose ends, such as canceling your business licenses, closing your bank accounts, and canceling your other monthly services and utilities.