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

Closing a business isn’t as simple as locking the doors and walking away. Whether you’re retiring, moving on to something new, or shutting down for financial reasons, you need to follow a formal process to wrap things up the right way. 

This guide walks you through the 10 essential steps to legally and financially close your business. Plus a few important extras depending on your business type.

Step 1: Create an exit strategy

Step 2: Notify employees

Step 3: Collect or sell outstanding receivables

Step 4: Sell your business assets

Step 5: File articles of dissolution

Step 6: File other relevant paperwork

Step 7: Inform your customers and complete jobs in progress

Step 8: Notify creditors and pay outstanding debts

Step 9: Submit final payroll forms and file taxes

Step 10: Distribute remaining cash or assets

Closing an LLC or sole proprietorship

Close your business with the IRS

Exploring alternatives to closing your business

Conclusion

Step 1: Create an exit strategy

Before you shut down your business, you need a plan. A clear exit strategy helps you avoid last-minute stress, stay legally compliant, and make the most of any remaining value in your business. Whether you're closing for personal reasons, financial pressure, or a new opportunity, the right strategy makes all the difference.

Sell, merge, or dissolve

Start by deciding if you’re closing completely, or if you might sell, transfer, or merge with another company. Selling can bring in income and keep your brand or product going. Merging may let you exit gradually or on better terms. If those aren’t on the table, you’ll go the dissolution route—formally closing and winding down operations.

Set a timeline and milestones

Next, map out your timeline. Think about how long it will take to notify your team, wrap up contracts, sell assets, and file paperwork. Set key milestones like “final day of operations” or “file dissolution papers.” Having deadlines helps you stay organized and reduces the chance of missed steps.

Identify legal and tax implications

Legal and tax implications are a big part of this phase. For example, dissolving a corporation has different requirements than closing a sole proprietorship. You may also need to pay final taxes, notify the IRS, or cancel business licenses. The rules vary by state and business type.

Consult with professionals

This is a good time to bring in help. Talk to a CPA to understand the tax impact and a lawyer to make sure your plan follows the law. They can also help you spot things you might miss, like final payroll obligations or hidden fees. A little upfront planning can save a lot of headaches later.

Step 2: Notify employees

Letting your team know the business is closing is one of the hardest parts, but it’s also one of the most important. Your employees have helped build your business, and they deserve clear, timely communication about what’s happening and what comes next.

Legal notice

Depending on the size of your business and where you operate, you may be legally required to give advance notice. The federal WARN Act, for example, applies to businesses with 100 or more employees and requires 60 days’ notice before mass layoffs. Some states have their own rules, so double-check what applies to you.

Final pay

Once you’ve picked a final operating date, give employees written notice. Let them know about their last working day, final pay, and what will happen with benefits like health insurance or retirement plans. Make sure to pay out any unused vacation or PTO if your state requires it, or if your employee handbook promises it.

Handle layoffs

Let go of employees with empathy. If possible, offer to provide references, write recommendation letters, or connect employees to other job opportunities. How you handle this step affects your reputation and how your team remembers you.

Documentation

Keep records of all communication with employees, including final pay stubs and benefit details. Good documentation helps protect you if questions or disputes come up later.

Step 3: Collect or sell outstanding receivables

Before you officially close your business, make a final push to collect any outstanding payments. Unpaid invoices might seem small on their own, but together, they can add up to a meaningful amount of cash you’ll want on hand during the wind-down process.

Review accounts receivable

Start by reviewing your accounts receivable. Make a list of all customers or clients who still owe you money, how much they owe, and how long the payment has been outstanding. Prioritize larger balances or older invoices, especially if you’re tight on time.

Quick payments 

To encourage quick payment, consider offering limited-time discounts. For example, you might give a 10% discount if they pay the invoice within the next week. You can also offer short-term payment plans for customers who want to pay but need a little flexibility.

Sell to an agency

If some accounts remain unpaid and the amounts are worth the effort, you can sell them to a collections agency. You won’t get the full amount, but it’s a way to recover some of it without chasing down every last dollar yourself.

Step 4: Sell your business assets

Once you’ve decided to close, it’s time to turn your business assets into cash. Selling equipment, inventory, furniture, or property can help you pay off outstanding debts and put some money back in your pocket.

List and value assets

Start by listing everything your business owns—from large items like machinery or vehicles to smaller things like tools, office furniture, or computers. Assign each item an estimated value based on age, condition, and market demand. You might want to hire an appraiser for high-ticket items or real estate.

Host a sale or auction

Next, decide how you’ll sell these assets. You can list them online, reach out to local businesses, or hire a broker to help you find buyers. For larger liquidations, consider holding a sale or auction. Auctions can move items quickly, especially if you’re working with a tight timeline.

Save records for tax purposes

Keep detailed records of each sale, including the item sold, who bought it, and how much they paid. You’ll need this info for your final tax return—and possibly for reporting capital gains or losses, depending on your business structure.

Step 5: File articles of dissolution

Filing articles of dissolution is a key step in officially closing your business. It lets your state know that your company is no longer operating and that you're wrapping things up in a legal and organized way.

Articles of dissolution are simple forms you submit to your state’s Secretary of State (or similar agency). The form tells the government that your business is voluntarily shutting down. You'll typically need to include your business name, entity type, and the date of closure.

The process varies by state. Some require you to clear any outstanding taxes before filing, while others may need you to get approval from your shareholders or partners first. 

For example, in California, if you're dissolving a limited liability company LLC, you'll file Form LLC-4/7 with the Secretary of State and notify the Franchise Tax Board. You can file online or by mail, depending on your preference.

If you skip this step, your business may still be considered active in your state’s system. That means you could be hit with annual fees, taxes, or penalties—even though you’re no longer operating. Filing makes it clear that you're officially out of business.

Step 6: File other relevant paperwork

After filing your articles of dissolution, there’s still a bit of cleanup to do. You’ll need to cancel or update any licenses, permits, and registrations tied to your business. Skipping this step could lead to fines, confusion, or even fraud under your name.

State and local licenses

Start with things like your sales tax permit, health department license, or professional certifications. Contact each issuing agency to cancel them officially. If you operate under a “doing business as” (DBA) name, don’t forget to cancel that too.

Business account

Next, close your business bank account once all transactions are complete. This includes clearing any pending payments, depositing final income, and ensuring all debts are paid. Closing the account helps protect you from future fees and fraud.

Make an announcement

Also, notify any local or municipal agencies that your business is no longer active. Depending on your location, this might include your city business office, zoning board, or county tax collector.

Step 7: Inform your customers and complete jobs in progress

Let your customers know you’re closing your business before the word gets out some other way. A clear, respectful message helps protect your reputation and shows appreciation for their support over the years.

Direct notification

Start by notifying customers directly—email, phone, or a posted notice on your website and storefront all work. Include your closing date, how you’ll handle outstanding orders or services, and any next steps they should expect.

Finish projects

If you have ongoing projects or service contracts, do your best to finish them or arrange a smooth handoff. Failing to complete work can lead to disputes, chargebacks, or negative reviews. If a project can’t be completed, consider offering a refund or referring them to another provider you trust.

Offer refunds or alternatives

Don’t forget about warranties or return policies. If you’ve made past promises, try to honor them or clearly explain how you’re wrapping up support. Clear communication goes a long way in helping customers understand your decision and leave with a good impression.

Step 8: Notify creditors and pay outstanding debts

Before you can fully close your business, you need to settle up with anyone you owe. Notifying creditors and paying off outstanding debts helps you avoid legal trouble and protects your personal finances, especially if you’ve signed any personal guarantees.

List and contact creditors

Start by making a list of all your creditors. This includes lenders, suppliers, service providers, landlords, and anyone else your business owes money to. Once you’ve got a complete list, notify them in writing that you're closing the business and provide your expected timeline for repayment.

Negotiate payment plans

Next, prioritize paying off those debts based on due dates, interest rates, or legal importance. If you don’t have enough cash on hand, consider using funds from selling your business assets or collecting outstanding receivables. You may also be able to negotiate payment terms, settle for a reduced amount, or set up a short-term payment plan.

Keep detailed records of all communications and payments. This protects you in case any disputes arise later and helps show you acted in good faith to wrap up responsibly.

Step 9: Submit final payroll forms and file taxes

As you wind down, don’t forget your tax responsibilities. Submitting final payroll forms and business tax returns keeps you compliant with federal and state laws—and helps you avoid penalties down the road.

Start by filing your final payroll reports. This includes W-2s for employees, 1099s for contractors, and your last Form 940 (federal unemployment tax) and Form 941 (quarterly payroll tax). Be sure to check the “final return” box where applicable to show the IRS this is your last filing.

You’ll also need to pay any remaining payroll taxes, including federal income tax withholdings, Social Security, Medicare, and state-level taxes. Missing these payments can trigger hefty fines, even after your business is closed.

Next, file your final business tax return. This depends on your entity type—sole proprietors file a final Schedule C, while corporations and partnerships have their own requirements. Mark the return as “final” and report any income from asset sales or outstanding receivables.

Close your EIN (Employer Identification Number) with the IRS if you don’t plan to reopen or start another business. You can do this by sending a letter to the IRS requesting that they close the account, along with your business name, EIN, and reason for closure.

As part of your final tax steps, corporations should also file IRS Form 966 to officially report the dissolution. This form notifies the IRS that your corporation is shutting down and helps close out your federal tax obligations properly.

Step 10: Distribute remaining cash or assets

Once you’ve paid off debts, filed taxes, and wrapped up operations, you can distribute whatever’s left—whether it’s cash, equipment, or other assets. This is the final step in officially closing your business.

Start by reviewing your ownership structure and any agreements in place. Distributions typically follow the rules below:

• Sole proprietorship: All remaining assets go to the owner.
• LLC or partnership: Assets are split based on ownership percentages, unless your agreement says otherwise.
• Corporation: Assets are distributed to shareholders according to the number of shares owned.

You may need to divide both cash and physical assets. For example, if the business has a company car, equipment, or leftover inventory, you can either sell it and split the proceeds or assign it a fair value and factor that into the distribution.

Be sure to document all distributions clearly and report them to the IRS where required. Some distributions may be taxable, especially if assets are worth more now than when the business acquired them. It’s a good idea to talk to a tax advisor to make sure everything is handled properly.

Closing an LLC or sole proprietorship

If you’re running an LLC or sole proprietorship, the closing process is often simpler, but there are still a few legal and tax steps you’ll need to follow to avoid future issues.

For LLCs

Each state has its own rules, but most require you to file a Certificate or Articles of Dissolution with the Secretary of State. Some states also expect you to clear outstanding taxes or notify creditors beforehand. If your LLC has multiple members, follow your operating agreement for how to divide assets and make final decisions.

For sole proprietors

You don’t have to dissolve a legal entity, but you do need to close things down officially. That means:

• Filing your final Schedule C with your personal tax return
• Canceling your EIN with the IRS (if you won’t reuse it)
• Ending any DBAs, local permits, or licenses

Don’t forget to cancel any local permits, licenses, or DBAs (doing business as names) associated with your business. Not doing so could lead to future fees or legal headaches—even if you’re no longer operating.

Close your business with the IRS

When closing your business, you need to officially notify the IRS to ensure everything is wrapped up properly. This will prevent any confusion or future tax liabilities.

File your final tax return

Regardless of your business type, you’ll need to file a final tax return. Make sure to check the “final return” box on the form to let the IRS know you’re officially closing up shop. This applies to your income tax return, employment taxes, and any excise taxes you may owe.

Close your EIN

If you’ve been using an Employer Identification Number (EIN) for your business, you’ll need to close it with the IRS. To do this, send a letter to the IRS requesting to close your business’s EIN account. Include your business name, EIN, and the reason for closure. The IRS doesn’t automatically close EINs, so this step is essential to avoid ongoing tax obligations.

Settle any outstanding federal taxes

Before you’re fully done, ensure all federal employment taxes (such as Social Security and Medicare) and excise taxes are paid. The IRS may ask for proof that all liabilities are settled before officially closing your business records.

Exploring alternatives to closing your business

If you’re not ready to completely close your business, or if it feels like a drastic move, there are several alternatives: 

One option is selling your business, which allows you to pass on your company’s assets, customers, and reputation to a new owner while you walk away with a profit. This is ideal if your business has a strong foundation and a market for its products or services.

Another option is merging with another company. If you’re looking to exit but still want the business to continue operating, merging could be a good choice. This involves combining your business with another, allowing both entities to grow and leverage each other's strengths. Merging can also help reduce your liabilities while maintaining involvement in the business under new ownership.

If you're not ready to sell or merge, consider temporarily pausing operations. This lets you regroup and revisit your business model or the market conditions before making a final decision. Similarly, transferring ownership to a trusted partner, family member, or employee can keep the business running without you at the helm.

Conclusion

Closing a business is never easy, but following a clear, step-by-step process can protect your finances, your team, and your reputation. From dissolving legally to settling debts and notifying the IRS, every step matters.

Need help managing the financial side of closing your business? Accounting software like QuickBooks can help you track final expenses, generate reports, and simplify tax filing.