First and most importantly, if you have employees, make your final payroll tax deposits and file all of your final employment tax paperwork on time. Also, the federal and state employment tax authorities need to know you're going out of business -- the federal unemployment tax return (IRS Form 940) and the employer's federal tax return (IRS Form 941) have a box you can check indicating you will not be filing future returns, and your state withholding and wage reporting return should have one as well. (For these and other IRS forms and publications, go to www.irs.gov.)
The IRS can hold you and any co-owners personally liable for payroll taxes, even if your business operated as a corporation or LLC. This means the IRS could take your personal assets, such as a car or a vacation house, to pay your business debts. Filing bankruptcy is of limited help in this area. Your only options may be to negotiate a payment plan with the IRS or get the IRS to accept a settlement, called an "offer in compromise." For more information on dealing with unpaid tax bills, see the Student Loan & Tax Debt area of Nolo's website.
If you will be selling off some business assets to recoup some of your investment, you'll need to file Form 4797, Sales of Business Property. (See IRS Publication 544, Sales and Other Dispositions of Assets for more information.) If you're selling all of your business assets as a group, you may need to file IRS Form 8594, Asset Acquisition Statement instead. For more information on selling your business, see Nolo's article Selling Your Business: Eight Steps.
As for income taxes, during tax time you will need to file a final tax return with the IRS and probably with your state tax agency as well. For partnerships, corporations, and LLCs, the federal return has a box you can check indicating that it's your final return. Sole proprietors just stop filing Schedules C and SE with their Form 1040.
If your business collected sales taxes, be sure to submit the final forms and funds that are due up to the closeout date to the state office that collects your sales tax.
Before your last day in business, if you have employees, make plans to pay them their last paychecks. Most states require employers to give employees their final paychecks on their last day of work or within a few days. Also, some states require businesses to pay out accrued, unused vacation days at the same time. For state-by-state laws on these subjects, see Nolo's article Final Paychecks for Departing Employees.
Apart from taxes, you may have run-of-the-mill business debts -- money owed to your landlord, bank, suppliers, utilities, and service providers. Notify these creditors of your upcoming closure and make plans to pay in full, or settle, all of these business debts. (See "Notify Your Creditors, Employees, and Customers," just below, for more information.) If you have paid off a particular creditor, ask for a letter indicating that your bills are paid in full.
If you fear you won't be able to pay all of your debts, you need to understand what options you have and how to minimize the risk to your personal assets. For more information, see Nolo's article When You Can't Pay Your Business Debts: Personal Liability and Bankruptcy Options.
If you can pay some but not all of your debts and you are considering bankruptcy for help with the rest, be careful not to make preferential payments to creditors such as friends and relatives. For more information, see Nolo's article Ten Tips for Financially Troubled Businesses.
Invariably, after you close up shop, a creditor will come out of the woodwork. If you have assets left, or cash left from selling the assets, you should set aside some money for potential claims and make sure that people who might need to get in touch with you have your contact information, so issues can be resolved efficiently, without damaging your business reputation.
Generally, you will need to notify the following people of your impending closure.
Suppliers. Suppliers will want to know when the last delivery should be made, what goods you're returning (if that's part of your contract), and where and how they'll get paid for goods they've supplied. However, if you're not ready to stop buying, you may want to keep your impending closure quiet for a while. Some suppliers, when they find out your business is about to close its doors, may pull your credit line and require that all orders be paid for in cash.
Service providers. These providers, such as utilities, business insurers, and payroll preparers, will want to know the final day you'll require services and where to send the final bill. If you have any deposits down, find out how to get them back. When you notify your business insurer that you are going out of business, the insurer will want to know about any potential liabilities that might crop up after the business is shut down. Be honest; you risk losing coverage if you don't disclose any pending legal threats or problems.
Bank accounts and credit cards. Be sure to close out your business bank account and cancel your business credit cards.
Lenders. If you have outstanding business loans, your lender will want to know how you plan on paying them off. The lender may want to take a look at any business collateral to make sure it's in saleable condition.
If you are plan on selling off the majority of your business's inventory and your business was retail, wholesale, or manufacturing, you may need to comply with your state's "bulk sales law," if it exists (only about ten states have these laws). These laws require you to notify your creditors a specific number of days before you close your business, and in some states, to publish a notice of your impending closure in a local newspaper. These laws can be tricky -- you may want to get help from a small business lawyer.
Landlords. Give your landlord the required amount of notice as stated in your lease -- at least 30 days. If you're closing your business before the end of your lease term, you are liable for any remaining rent payments (although depending on your state's law, your landlord might have what's called a "duty to mitigate" by looking for a new tenant). In any case, your landlord will probably want to work with you rather than chase you down for the money in court, so you may be able to negotiate something. If you're not breaking the lease early and the landlord is holding a deposit from you, be sure to get it back.
Employees. If you have employees, tell them what you expect from them until the last day. If you fear a premature mass exodus of employees, tell only key employees of your plans to close -- but be sure to give the rest of your employees at least two weeks' notice.
Customers. Give your customers plenty of notice that you are going out of business, then fill any last orders, complete any final projects, and fulfill any contractual obligations. If you can't, let the customer know immediately and return any deposits or payments for goods not delivered or services not rendered. If you're sitting on saleable inventory, consider a "going out of business" sale.
If you have outstanding accounts receivable, try to collect these bills before you close your doors -- they may be much harder to collect once you're out of business.
Yes, closing your business requires you to keep track of numerous tasks and remember lots of loose ends. To make it easier, print out Nolo's Checklist for Closing Your Business: 20 Things You Need to Do.
Even if your business is ending on a not-so-successful note, don't burn your bridges -- make sure that people who might need to get in touch with you have your contact information; for instance, a former employee may need a reference. You never know when a contact can help you out in the future.
Also, you should keep any dissolution and winding up paperwork organized and close at hand so you can get to the information quickly and easily if you need it.
For answers to an array of legal questions and problems facing small business owners, see Legal Guide for Starting & Running a Small Business, by Fred S. Steingold (Nolo).
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by: Beth Laurence, J.D.
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