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6 Steps to Closing a Business While Staying Compliant
by Deborah Sweeney
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May 5, 2022
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Sign hung on chain link fence reading "store closed" in red lettering

For most entrepreneurs, the thought of closing their small business is generally not one that frequents their minds. However, for any number of untold reasons, such as the owner deciding to move to other ventures or the company simply running its course, it’s not a bad idea to have an understanding of what it means to formally close the business with the state.

If you are currently in the process of voluntarily ending the business’ operations, take care of these areas to ensure your business is officially terminated with the state.

1. File articles of dissolution.

If you incorporated as a limited liability company (LLC) or as a corporation and are already in good standing with the state, part of terminating your business means filing articles of dissolution. This document serves as a formal closure notice of the business. You may need to check in with the state you’re closing the business in to see what kind of information is required when filing, but generally, you will need to include:

  • Name of your business
  • Date the dissolution will go into effect
  • Reason for dissolving the company
  • Whether or not your business has any pending legal actions.

By filing articles of dissolution, you are notifying the Secretary of State your business is closed. You won’t need to continue paying state or renewal fees, file annual reports, or complete any other obligatory paperwork because the business will no longer exist through the eyes of the state.

Before you file the articles of dissolution, however, you will need to have everyone vote and agree on the dissolution. If you incorporated as an LLC, “everyone” means your managing members. They must agree to and grant approval for the dissolution. For corporations, this would be the board of directors and shareholders. The corporation’s directors draft and approve a resolution to dissolve the business, then hold a meeting where minutes and documented and shareholders vote on it. If you are unable to secure enough votes to dissolve the company, you may not be able to dissolve the business.

2. File an application of withdrawal.

If your company is registered to do business in any other outside of your home state, you must file an application of withdrawal (also referred to as a certificate of termination). Failing to do this means that although your business is closed in one state, it is still considered to be open in another and is therefore liable for taxes and fees.

3. Notify and pay employees.

As soon as you are able to, you must notify your employees (if you have any) about the business closing so they are not left in the lurch. They must be compensated with their final paychecks, bonuses, and any unpaid vacation days (if required by the state) on their last day of work. Employers must also file final employment tax returns along with final federal tax deposits of these taxes.

The IRS keeps a handy checklist available detailing employee forms to file before the business closes that include, but aren’t limited to:

  • Final employment tax forms
  • W-2 forms
  • Form 1099-MISC for sub-contractors
  •  Form 5500 for employee pension and benefit plans.

If you have an employer identification number (also known as an EIN, which is a requirement before hiring employees), you may also notify the IRS should you decide to stop doing business under the EIN.

4. Send cancellation notices and file Form 966.

If your business is incorporated as a public corporation, it is required by most states to make a formal announcement about closing down in a dissolution proposal. This proposal will be made public record and will name the corporation and confirm that a majority vote ruled in favor of the dissolution. Additionally, corporations must file Form 966 within 30 days of filing their articles of dissolution.

5. Distribute assets.

Before you can distribute the company’s assets, make sure you have paid off any outstanding debt, notified creditors associated with the company, and closed your business bank accounts. If assets still remain, they must be distributed to owners based on the percentage of the company that they own. Assets at LLCs are distributed by how much the members originally contributed. Corporations pay shareholders based on the amount of shares they own with shareholders returning their outstanding shares.

6. Tie up any remaining loose ends.

Before you pack up your final boxes, I recommend referring back to the IRS checklist to ensure you have not forgotten anything. Then, you can lock your doors forever, and bid your small business a fond farewell.

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About the author
Deborah Sweeney
Deborah Sweeney is the GM & VP, Small Business Services at Deluxe Corporation. She is an advocate for protecting personal and professional assets for business owners and entrepreneurs.
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Male restaurant owner sitting in closed dining room area
How to Properly Dissolve Your LLC
There are many reasons to close your business, not all of which are related to failure. Whatever the cause, there is a proper procedure for LLC dissolution.
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