How to Shut Down a Failing Small Business
Though it’s likely not the outcome you want for your company, it’s a fact of life that many small businesses close. When it comes time to shut down a failing small business, there are certain steps you must take to ensure proper closure and avoid future tax bills and fines.
You must file and pay annual taxes even if your business only operated for a small portion of the year before its closure. This includes federal taxes, state income taxes, and employment taxes. Most tax forms will include a box you can check indicating this is the business’ final tax return. The IRS website includes a checklist of all the tax forms you need to fill out when closing a business based on the company’s type and structure.
If your business has employees, you’ll need to make the final federal tax deposits for them before closing up shop. You’ll also need to contact the IRS to terminate your Employer Identification Number (EIN) account, which is your business’ taxpayer ID.
If you don’t create the proper dissolution documents or an agreement of partners to close the business, the government will list your business as an ongoing entity, which means you may accrue taxes and fees unnecessarily once the business is closed. This paperwork is something that a small business attorney can help you file. While it’s not essential for all types of businesses, if you have partners and investors, it’s a good idea to file dissolution documents to avoid future headaches regarding liability and ownership.
Settle all your remaining debt on small business loans, lines of credit, and credit cards. Pay investors, vendors, suppliers, and anyone else to whom you owe money. Your accountant can assist you in creating an appropriate payment plan. If you are unable to pay these debts, you may need to retain a business attorney to help you file for bankruptcy.
Contact your banks and creditors to close out your bank accounts and cards. Failure to do so could result in fees and fines down the road.
Cancel all accounts you have on behalf of your business. This can include local and federal business licenses and permits, liability and workman’s compensation insurance policies, and employee health insurance. If you operated your business under a trade or DBA name, cancel that. Again, if you fail to close these accounts, you could see future bills and fines long after you shut down a failing small business.
You might be able to recover some of your financial losses by selling your business assets. This can include furniture, machinery, and even client lists. Be aware that any money you make off these sales is taxable and needs to be reported to the IRS with an Asset Acquisition Statement.
Though you might be ready to chuck all of your business-related paperwork and documentation once the business is closed, hang on to it for at least three years in case your taxes are audited or you receive what you think is an unfair charge or fine related to the former business.
Though shutting things down may not be the desired outcome for your business, doing so properly can help you maintain at least a portion of your investment and avoid unnecessary fees and expenses in the future.