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Steps to Dissolving a Business

When operating a business over time, you may reach the point where you need to close up shop. While this may be for one of numerous reasons, such as retirement financing or personal issues, a business must follow certain steps. Before beginning the dissolution, business owners need to consider taxes, relationships, reputation and legal issues that will need to be addressed throughout the process.

Follow these steps to dissolve your business properly and legally:

1. Consult Business Agreements

Once you decide to close your business, you will need written permission from all owners of the business (unless you are a sole proprietor, in which case this does not apply). If you are part of a partnership, LLC or corporation, you need to follow the Rules of Dissolution, which can be found in your original agreement documents. State laws may also include rules that need to be followed upon dissolution.

While these rules will vary depending on your original agreement and the state you operate in, typically a two-thirds or a majority vote is needed to continue with dissolution.

2. File Dissolution Documents with State

You will need to file dissolution papers in your state unless you are operating as a sole proprietor. These are called Certificates of Dissolution or Articles of Dissolution, and they alleviate future tax burdens and alert creditors that you are dissolving. All states require you to settle your debts, and some states require additional tax-clearance paperwork that verifies you have paid all outstanding taxes. Be sure to give notice to all states you operate in.

Contact your Secretary of State for more information on specific state laws regarding dissolution.

3. Resolve Credit Issues

Creditors will receive notice that you are unable to take on further debt when you file dissolution papers with your state. You will need to pay any outstanding debt. You may also be able to work out a compromise with your creditor regarding payback amounts and timelines.

In addition, you need to resolve any outstanding credit with suppliers and customers. This means paying any money you owe and collecting any money owed to you. It is especially important to collect owed money as soon as possible; it will be difficult to ask for money for a business that is no longer in operation.

If you can’t pay what you owe, you will need to consider various personal liability and bankruptcy options.

4. Notify Tax Agencies

You must make final federal, state and local tax deposits and file your annual return for the year you dissolve your business. Notify your state’s Franchise Tax Board to ensure that future taxes are not incurred after dissolution.

For other tax considerations and links to all tax forms you will need to file, view the “Closing a Business Checklist” from the IRS.

5. Cancel Business Licenses, Permits and Fictitious Business Names

Cancelling these licenses and permits will help reduce the possibility of fraudulent behavior under your business name after you close your doors. For fictitious business names, you may need to file an “abandonment” document through your county clerk.

6. Inform Other Parties of Dissolution

Don’t forget to inform your landlord of your plan to dissolve and comply with your original lease agreement. Employees also need to be informed of dissolution and paid for their last days of work. You may also need to compensate employees for any remaining unused leave time.

You can inform clients, customers, vendors, etc. in a number of ways, including written letters or advertising announcements. Be sure to fulfill and/or cancel any leases or contracts that remain with these parties.

7. Sell and Distribute Assets

Getting rid of your business assets can help you take care of remaining financial responsibilities. You need to ensure that assets are distributed appropriately among owners and partners. For example, if someone owns 10% of the business, they should receive 10% of the assets. When selling inventory, be sure to follow bulk sales laws.

An Agreement for Sale of Assets of Corporation can help guide the process of selling corporate assets to a third party.

Consult with your attorney with any questions you have regarding the legal process to ensure a smooth dissolution. Also, make sure you keep all paperwork related to the closing of your company in case any tax, employment or other issues arise.