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Closing Your Small Business

  • Jan 10, 2016 | Mark Berens

It’s an often-heard statistic: 50 percent of all small businesses fail in the first year, and within five years, 95 percent will fail.

Often heard, yes. But not particularly accurate for two reasons. First, people have a nasty tendency to say a business failed when it closes, suggesting that a hapless owner ran it into the ground. While people may say this, the folks who actually track these things -- those in the Small Business Administration (SBA) -- instead use the term “business closure,” which includes failures, but also planned exits, selling the business, or simply retiring. Secondly, according to SBA statistics, even when adding these clarifications, the actual numbers show that about 50 percent of all employer establishments (businesses with one or more employees) survive at least five years, and a third survive ten years or more.

While the numbers aren’t as grim as popularly reported, closures are still a very real part of the business cycle. In this post, we’ll share some tips from state agents who work with small business closures and offer a general guide on how to successfully hang up the “Gone Fishin’” sign.

Closing Up Shop? Experts Say...

Follow the rules -- especially regarding filings.

The SBA defines a small business as an enterprise with fewer than 500 employees. In the United States, we boast almost 28 million small businesses, the majority (75 percent) being sole proprietorship “nonemployers” at 22.5 million, followed by 6 million “employers” (with one or more employees).

For states, the posting info online has made it easier for these owners to properly self-close their shops. However, in checking with representatives from Maryland and North Carolina, it’s clear that even the best-laid Web directions don’t erase human error.

“We see problems when a company decides to close its doors but doesn’t take the time to inventory their real property or other property assets,” says Jerome Davis, QA specialist with the Maryland Department of Assessments & Taxation. “When they submit their articles of dissolution and officially close, they find out later that they have property to sell. But once the company is gone, they can’t finalize the sale, which becomes very problematic.”

North Carolina sees the same issue. “A common problem is when a business forgets to file the article of dissolution and annual reports. Some forget to dissolve that corporate structure and owe the state annual reports to officially be dissolved,” says Liz Proctor with the North Carolina Secretary of State.

From the people who help owners close their business, a gentle reminder: Follow the rules, even if you think you know it all. The following should help.

4 General Steps to Closing a Business

While this list is by no means exhaustive, following these general steps will help protect your personal assets, credit, and reputation. Most importantly, heed the advice from the folks above: If you’re unsure (or even if you think you’ve got it nailed), call the state for help or to simply confirm what you think you already know.

1. Officially vote on closing

Why it’s important: To avoid paying annual fees and filing annual reports.

What to do: For sole proprietors, it’s easy -- look deeply into a mirror and say, “I quit.” For partnerships, LLCs, and corporations, you and your business associates must agree to end the entity by following either the rules in your bylaws or the rules of the state in which you do business. Both require an official record of the decision.

2. Notify federal, state, and local jurisdictions

Why it’s important: To let institutions know your business is no longer liable for business taxes or filings.

What to do:

  • Visit the state website. States and/or counties make their websites a one-stop shop for dissolving a business entity by providing all of the rules, forms, and info on canceling permits and licenses in one spot (for example, here are sample guides from Illinois, Pennsylvania, Texas, Maryland, and New Jersey).
  • Wrap up your taxes. Review and pay any sales and (if you have employees) payroll taxes. Your business’s final income tax return for the year in which you close has a box that indicates this is your final return. Check it. Then make sure that all relevant federal and state tax agencies know you’re closing and not to expect unemployment returns and quarterlies. Make sure you follow up on all year-end reporting requirements for those employees (i.e., produce a W-2)
  • Close your EIN. Businesses need to contact the IRS to close their Employer Identification Number (EIN) account. Note the term is “close,” not cancel -- the IRS does not cancel EINs; yours is yours forever in case you decide to fire up the boilers again.

3. Notify your creditors

Why it’s important: It's crucial to zero out any outstanding debts with creditors and to let them know you’ll no longer be incurring new debt. In both of these scenarios, either in the form of full payment or an agreed-upon settlement, request and get letters stating that you’ve squared things away. It’s a good idea to have some money set aside for potential claims from customers or others associated with your business.

Sample contacts:

  • Service providers. Let utility companies know when to turn the lights off and where to send the last bill, including any deposits they may owe.
  • Insurers. As above, let them know when you’re closing but also have a frank discussion about any potential liabilities. You definitely won’t benefit from trying to hide any suspected or looming legal issues concerning your closure. This may also help inform the appropriate time to close your entity, and whether you need a special kind of liability or professional insurance to cover claims that may exist.
  • Lenders. Talk with your lender about paying off any outstanding loans, which may trigger a look at any collateral if they think you’ll come up short (make sure it’s in good shape if so). If you’re going to lean on professionals for advice (e.g., accountants and attorneys), this step is a good time to call them in.
  • Landlords. You’re bound by the terms of your lease regarding notice, which is usually at least thirty days. Likewise, if you’re closing before your lease is up, you’re generally liable for remaining rent, although most landlords will work with you if you help find a new tenant or make other arrangements. Don’t forget your deposit.
  • Bank accounts and credit cards. Be sure to close out your business bank account and cancel your business credit cards. This step is one of the easiest ones, so save it for last after you’ve notified all of the others above. Consider it a reward for doing the harder work.

 4. Notify the people you saw the most

Why it’s Important: Humanity. Reputation. Goodwill. (Repeat.)

Break the news to:

  • Employees. First, give proper and required notice -- generally at least two weeks if you have fewer than 100 employees, at least sixty days if you have 101 or more. Then, regardless of the time limit, set work expectations so your employees’ waning days aren’t spent smuggling out office supplies. Distribute final paychecks on the last day or within a few days of the closure, including any vacation time.
  • Customers/clients.Though you’re closing, the people who depended on your business are still forging ahead, so give them plenty of notice and fulfill any contractual and/or personal obligations to the best of your ability. If you can’t make good, refund deposits or payments. On the flip side, don’t let customers take advantage of your situation: Collect on any accounts receivable before you close. It’s too easy to forget you when you’re gone.
  • Suppliers. Let your delivery folks know what day will be last call, if you’ll be returning unused goods, and how you’ll pay for what you already have. This can be a dicey proposition depending on what goods you received. You may be able to work out a deal, or they may just demand cash for their warehoused goods. Have cash on hand.

By the Book, Off the Hook

Closing a business, particularly with all the help you can find online, is a relatively simple process -- when you play by the book. Problems crop up when you think you can take shortcuts or just don’t pay attention. Follow any procedural checklists provided by the state, keep all records for three to seven years, and you’ll be good to go (literally). Happy fishing!

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Avalara Author
Mark Berens
Avalara Author Mark Berens