6 Steps on How to Dissolve Your US Company

Do you want to close your US company? Learn the 6 essential steps that you need to know in this comprehensive guide. Get started today!

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Let’s predict something here; you are overwhelmed with your US company and frustrated with all the complications you are facing now. With all these turmoils, you are looking for solutions to your situation. And you are fully determined to close your company.

We know that a company or business is someone’s dream. Sometimes it is also the only means of livelihood, the primary source of income, and so on. But this dream company or business can be a burden that weighs you down. Hence, the closing situation arose. We can totally understand that the decision wasn’t easy for you; still, you are here.

So, let’s hurry and go straight to exploring the easy way to close a company. Today we will discuss a few steps for closing a company properly and legally.

And will cover a few questions, including “How do I close a sole proprietorship business?” and “How to close an LLC?”

Why and When Should You Close Your Company?

We are hoping that you are already determined to close your company. You are already at the point where there’s no turning back on your agenda. Still, let’s talk briefly about the reasons why and when you should close your company.

There are a few times when you should take the drastic step of closing your company. 7 Signs of why and when you should close your company are mentioned below:

  1. When your company is insolvent and cannot repay its debts.

  2. When average marginal revenue drops below average variable costs.

  3. When the business fails.

  4. When debt relief attempts have failed.

  5. When the company has no future.

  6. When your business has outgrown you, or you have outgrown your business.

  7. When your industry is shrinking or sinking.

To know more, please check out the blog titled “7 Signs of Why and When You Should Close Your Company.”

Required Forms to Dissolve a Business

Operating a business involves keeping various records, regardless of the company’s products or services. And the same thing applies to dissolving a business.

Forms for Sole Proprietorship

There are a few tax implications associated with closing a sole proprietorship. For the year in which they go out of business, sole proprietors must file Schedule C (Form 1040 or Form 1040-SR), Profit or Loss From Business, along with their Form 1040, U.S. Individual Income Tax Return, or Form 1040-SR, US Tax Return for Seniors. Sole proprietors may also be required to file the following with their Form 1040:

  • They must complete Form 4797, Sales of Business Property if they exchange or sell any of their company’s property. They must also file this form if the commercial use of certain Section 179 or listed properties falls to 50% or less.

  • They must complete Form 8594, Asset Acquisition Statement if they sell their company.

  • If self-employment tax is due, they must complete Schedule SE (Form 1040).

Forms for C Corp and S Corp

If you are dissolving a C-Corp, you must file Form 1120 with the IRS and report gains and losses on Schedule D. This is a form for filing an income tax return. In the same way, closing an S-Corp requires filing Form 1120-S and using Schedule D of that form to report any profits or losses. 

Form 1120-S is the US income tax return for an S-corporation. Both forms have a “final return” box that must be checked. Form 966 (Corporate Dissolution or Liquidation) must also be filed if the closing results from a board resolution or other plan to close the company or liquidate its stock.

LLC Forms

For tax purposes, sole-member LLCs are automatically considered sole proprietorships. When filing your individual income tax return for the company’s final year, you can document that you closed the business during the tax year on Schedule C of your tax return. LLCs taxed as partnerships will check the box on Form 1065—U.S. Return of Partnership Income—indicating that the business has closed and reports gains and losses on Schedule D and Schedule K1. This includes the Partner’s Share of Income, Deductions, Credits, etc.

Forms for Non-Profit Organizations

Nonprofit organizations must notify the IRS of the termination of their business and file Schedule N of Form 990 with the IRS to document the remaining corporate assets and how they were distributed.

Some businesses must also file additional paperwork, such as forms documenting the sale or exchange of business property or an asset acquisition statement if the business is sold.

6 Steps on How to Close Your US Company

There are a few easy steps to closing your business. Those are given below:

Step 1: Filing a Final Return and Related Forms

When you close your business, you must file a final return. The nature of your business will determine the type of return you file and the related forms you need. A limited liability company (LLC) is a legal entity formed under state law. For federal income tax purposes, an LLC can be classified as a partnership, corporation, or entity separate from its owner. And all of those have their forms to file.

For Sole Proprietorship: You could have the question, “How do I close a sole proprietorship business?” Well, to close a sole proprietorship, File Schedule C (Form 1040 or Form 1040-SR), Profit or Loss From Business, with the individual tax return for the year one closes their business. Other forms will also be needed-

  • Form 4797, Sales of Business Property.
  • Form 8594, Asset Acquisition Statement.
  • Schedule SE (form 1040), Self Employment Tax.

For partnerships, one must file Form 1065, U.S. Return of Partnership Income, for the year they close their business. Other forms will also be needed-

  • Form 4797, Sales of Business Property.
  • Form 8594, Asset Acquisition Statement.

For a corporation, you must file Form 966, Corporate Dissolution or Liquidation, if you pass a resolution or plan to dissolve the corporation or liquidate any of its stock. For a C corporation, one must file Form 1120, the U.S. Corporate Income Tax Return, and report their capital gains and losses on Schedule D of Form 1120.

For an S corporation, you must fill out Form 1120-S, U.S. Income Tax Return. And report their capital gains and losses on Schedule D of Form 1120-S. They must also check the “Final K-1” box on Schedule K-1, Shareholder’s Share of Income, Deductions, Credits, Etc.

Regardless of the type of corporation, other forms will also be needed-

  • Form 4797, Sales of Business Property.
  • Form 8594, Asset Acquisition Statement.

Step 2: Take good care of your employees

Employees must be well cared for.

  • Employment Taxes: If you have one or more employees, you must pay them their final wages and other compensation. In addition, you must make final federal tax deposits and report employment taxes. If you do not withhold or pay employee income, Social Security, or Medicare taxes, the Trust Fund Recovery Penalty may apply.

Step 3: Pay the Taxes You Owe

Pay any taxes owed to the IRS. It’s important.

Step 4: Contractor Payments Must Be Reported

If you paid at least $600 to a contractor for services (including parts and materials) during the year your business closed, you must report those payments.

Step 5: Close your IRS business account and cancel your EIN

Your company’s employer identification number, or EIN, is its official federal taxpayer identification number. You must send us a letter that contains the following information if you want to cancel your EIN and close your IRS business account:

  • The complete legal name of the business or company.
  • The company’s EIN.
  • The company’s address.
  • The reason you want to close the account.

Step 6: Keep All Records

The length of time you must keep your business records is determined by what is recorded in each document.

Property Records: Generally, keep property records until the statute of limitations for the year in which you dispose of the property expires. The statute of limitations is the time limit within which you can amend your tax return to claim a credit or refund, or the IRS can assess additional tax. 

Employment Tax Records: Keep all employment tax records for at least four years.

How Do I Let the IRS Know the Business Is Closed?

Businesses of all sizes should send the IRS a letter containing the company’s name, EIN, and address to close the IRS account and cancel the EIN. After successfully following the steps mentioned below, the IRS will automatically know about your business dissolution. And you’ll be up-to-date with all the required compliances. For more details, visit the IRS website.

How to Close a Small Business

Though we have already covered the legal and proper six steps on how to close your company, there are also a few steps that come naturally for small businesses. Those are briefly given below.

There is much to do when closing down a small business, from the emotional aspect to the logistics. Believe it or not, closing a business is often a complex, multi-step process that will consume a significant amount of your time, energy, and, yes, even money.

This post will walk you through everything you need to know to avoid financial problems and legal penalties resulting from your business’s closure. While we do not recommend doing this all by yourself (you should consult with a lawyer and a CPA at the very least), it is important to understand what you must do in the coming weeks and months.

Look at the briefly mentioned steps:

  1. Make the Hardest Choice: The first step is to put aside your feelings and give your business an honest evaluation. Then you have to make the hard choice of whether or not to keep your business going. Using your own credit cards to pay for business costs, having health problems, not selling enough of your product, and losing key employees are all signs that it is time to close your business. If you no longer have fun, it is probably time to stop. After all, the reason you started was to have fun and do what you love.

  2. Plan for an Orderly and Well-thought-out Shutdown: When you decide to close your small business, there are many things to do, like selling assets, paying off debts, closing accounts, firing employees, and taking care of other details. It can be hard to keep track of everything, so it is best to get help from experts like lawyers, accountants, and brokers. The Small Business Administration (SBA) website and the IRS Closing a Business portal both have helpful information and step-by-step instructions on how to file documents, follow the law, settle financial obligations, and handle taxes. You can get more help from legal resources and a checklist that the IRS gives you.

  3. Get All the Decision-Makers on Board: If you are the only owner of a sole proprietorship or an LLC, you can shut it down by yourself. But if you have partners or investors, you must include them in the decision and follow the closing process outlined in any agreements.

  4. Inform Your Employees: When closing a business, it is important to inform your employees personally and as soon as possible. Follow employment and labor laws to ensure employees get paid the right amount. If you have more than 100 employees, you need to give at least 60 days’ notice before you close or let go of many people.

  5. Collect Unpaid Accounts: It will be difficult to collect money owed to you before publicly announcing the closure of your business. So, it is important to have a strong plan for getting unpaid bills paid. Offer discounts for quick payments, or call or visit the account manager in person. This will help you save money to pay your taxes and legal fees.

  6. Inform Your Customers and Start Closing Accounts: Once you have all the information you need, let your customers know about the closure early so they can make other plans. It is hard for you and for your customers, who depend on your products or services when you have to close your business. Do not put them in a hard situation by not giving them enough notice.

  7. Dissolution Documents Should Be Filed: If you registered your business as an LLC or corporation, you must close it in the same state where you registered it. Otherwise, you will be liable for taxes and debts. Each state has its own set of rules for submitting a Certificate of Dissolution. Some states require debt repayment before filing, whereas others require filing first. To be sure, check your state’s regulations and consult with an accountant or lawyer. Sole proprietors are usually exempt from filing any paperwork with the state.

  8. Maintain Your Tax Obligations: The actions you need to take depend on your business, but generally, you’ll usually have to:

    • Send your final tax returns to the state and federal government for income, sales, and employee taxes.
    • Close your Employer Identification Number (EIN).
    • Inform me about any business asset sales.

  9. Cancel All Business Licenses and Permits: To stop others from using your business name or account and avoid negative consequences like taxes and penalties, you must contact the agency that issued your license, registration, or permit and follow their specific steps to cancel it.

  10. Pay Off Any Outstanding Debts: As you close your business, make sure to settle any money you owe to lenders, suppliers, and vendors. You can try talking to them to discuss and agree on your owed amount. Additionally, selling off your business assets like office equipment and customer lists can help generate money to repay your debts.

  11. Consider Your Bankruptcy Options: Closing a small business can sometimes happen without declaring bankruptcy, but it’s not always possible. In extreme cases, you may have to file for bankruptcy. If that’s your only option, check out the IRS website for guidance on declaring bankruptcy.

    However, don’t rush into this decision. The Wall Street Journal has examples of costly small business bankruptcies, ranging from $100,000 to $600,000. So, before choosing bankruptcy, carefully assess all your business assets, including customer lists, office equipment, websites, buildings, social media accounts, and trademarks, as they may have value.

  12. Distribute Your Assets and Close Your Financial Accounts: After you have paid your employees, taxes, and debts, you can give the remaining assets to yourself and other partners or owners, if there are any. Then, close your business bank account and cancel any business-related credit cards.

  13. Maintain Records: It’s a good idea to save your important documents, such as tax and employment information, for three to seven years after closing your business. Certain records, like your articles of incorporation, should be kept forever.

  14. Take Some Time to Grieve: You may be too busy with the details of closing your business to grasp the loss until it’s all over fully. At that point, you may wake up one day and realize you have nothing left to do but think about your failed business. Experts believe you’ll go through five stages of grief: Denial, Anger, Bargaining, Depression, and Acceptance. For social entrepreneurs, these stages are slightly different: Denial, Blame, Self-Flagellation, Learning, and Starting again. It usually takes time to go through these stages, but dedicating a day to focus on your failure and allowing yourself to grieve may help you move more quickly toward acceptance.

Lastly, Get back up and move on After recovering from a failed small business, you can start anew by trying another business, joining an existing start-up, or finding a job in a traditional company. Learning from your failure can lead to a better outcome than before. The Harvard Business Review article “Strategies for Learning from Failure” explores how companies learn from failure and offer helpful approaches. It’s important to have a positive mindset and view failure as a stepping stone to future success. Although it’s ideal to have a successful business without facing closure, it’s comforting to know that others have faced similar situations and have been able to bounce back.

Last Words

So, here we are at the very end of our blog. We hope you have gotten all the answers you were looking for. And we humbly sympathize with you if you are hurt about your dream business’s dissolution. But perhaps it’s time to let go and move on toward new dreams. Think and start afresh.

We, Business Globalizer, are here to help you advance towards the future. Feel free to contact us.

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