Deciding to close a business that you’ve put your blood, sweat, and tears into can be an emotional experience. That’s especially true of entrepreneurs who have operated as sole proprietorships or partnerships. Essentially, they become “one” with their companies, making saying “goodbye” bittersweet even when the time is right for closing.
Fortunately, the overall process for closing a sole proprietorship or partnership is relatively uncomplicated (compared to dissolving a corporation or limited liability company). That’s helpful for sure, particularly if you’re aiming to finalize your business by the end of this year.
Since the business owners in a sole proprietorship and partnership have legal responsibility and accountability for all business decisions, legal matters, and financial obligations, it’s relatively straightforward to end the existence of those entity types. Still, it’s essential to have a plan because loose ends could create unanticipated issues down the road. The exact tasks involved may vary depending on the industry, business activities, whether the business has hired employees, the state’s rules, and other factors.
The steps below represent many of the typical actions required to officially close a sole proprietorship or partnership.
1: Reach Out to Professionals for Guidance
Every business owner’s situation has unique qualities that can impact what they need to do to cover all the bases when closing a sole proprietorship or partnership. To make sure no necessary tasks get overlooked, consult the expertise of a trusted business attorney and accounting professional.
This is especially important for partnerships. The business’s partnership agreement should spell out how to go about closing the business. And it should explain how assets and liabilities should be divided among the partners. Unfortunately, things can become complicated if the partnership agreement is not clear or the partners disagree with how to interpret the agreement’s provisions. Also, states have rules regarding some aspects of winding up a partnership. So, a lawyer’s assistance can help ensure a smoother process and avoid drama.
2: Gain Partners’ Approval
Generally, a unanimous vote is required to approve a partnership’s dissolution. If all partners do not agree with closing the business, then there may be an option for one or more partners to buy out the partners who wish to no longer operate the business. If partners cannot agree on the price or other conditions, it may be helpful to contact a third-party mediator who can negotiate the buyout and move things forward.
3: File Dissolution Forms with the State
Keep in mind that not only does the business’s partnership agreement dictate the process and rules for closing, but the state might also have rules in place for terminating partnerships.
Depending on the type of partnership — e.g., limited partnership (LP) or limited liability partnership (LLP) — the state may require filing dissolution paperwork with the Secretary of State (or comparable agency) and paying a fee. Even general partnerships, which aren’t official business entities, may have to submit dissolution information or a form to notify the state about the company’s intent to terminate. The names of the forms vary from state to state, with most calling them either “Statement of Dissolution,” “Certificate of Dissolution,” or “Statement of Cancellation.” After filing this paperwork, a partnership continues but only to wind up the business.
Again, states’ rules that govern partnerships vary, so business owners must review the applicable requirements in their state.
4: Notify Employees
Even if not required by law to provide advance notice of a business’s closing, sole proprietors and partnerships with employees should consider the impact of blindsiding workers.
Imagine if workers learn about the dissolution from a client, vendor, or the press? Besides potentially feeling disregarded, they won’t be prepared to answer questions and represent the company in the best light possible as it winds down operations.
5: Review Contracts and Agreements
Any contracts with customers, vendors, suppliers, creditors, etc. should be reviewed for provisions related to terminating the business. Business owners can find an attorney’s assistant helpful, as legal obligations aren’t always crystal clear.
6: Let Clients Know
It’s critical to notify these stakeholders ahead of time. If the sole proprietorship or partnership has any remaining contract deliverables to fulfill for customers, they must address those obligations. Also, communicating proactively with clients sets the stage for sending final invoices and collecting outstanding accounts receivables.
7: Contact Suppliers and Contractors
Other parties that will need to know that a business is closing are the folks who provide products and services to it and anyone the company owes money to. Not only is it polite to give them written notice, but there may also be contractual obligations, accounts payables to settle, and possibly even equipment or other property to return.
8: Settle Outstanding Debts
If a sole proprietor or a partnership doesn’t have enough money to cover what they owe to vendors, suppliers, contractors, and creditors, they will likely need to sell some or all the business’s assets. Examples include:
- Office furniture
- Electronics
- Company vehicle
- Office supplies
- Real estate
- Intangible assets, such as patents
Business owners can sell remaining assets left after settling the company’s obligations to generate money for their personal use. In a partnership, the remaining assets or money from selling them should be distributed among partners according to the partnership agreement’s provisions.
If selling a business’s assets cannot generate enough cash to cover debts, the business owners may be personally responsible for settling what’s owed. Remember, sole props and partnerships are considered the same legal and tax-paying entity as their owners!
9: Cancel Licenses and Permits
Sole proprietorships and partnerships that sell taxable goods or services must notify the appropriate state (or local) tax authorities to cancel their sales tax license and ID. Likewise, if a business needed other licenses and permits to operate legally, those should be canceled, too. If a sole proprietor or partnership has filed a DBA (doing business as) — also known as “fictitious name registration” — to market the company under a name other than the owner’s full name, the business owner should notify the state or local agency that issued the name of the business closure.
10: File Your Final Returns
Even though sole proprietorships and partnerships are pass-through tax entities, there will be some tax details to wrap up. They will vary depending on the complexity of the business’s operations, the state, and whether the business has employees.
At the federal level, partnerships must file Form 1065, U.S. Return of Partnership Income, for the year they cease operations, reporting capital gains and losses on Schedule D (Form 1065).
According to the IRS, sole proprietors’ and partnerships’ final federal employment tax filing obligations are:
- File Form 941, Employer’s Quarterly Federal Tax Return (or Form 944, Employer’s Annual Federal Tax Return), for the calendar quarter in which they make final wage payments.”
- File Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, for the calendar year in which final wages were paid, checking off box d in the Type of Return section to show that the form is final.
- Provide Forms W-2, Wage and Tax Statement, to employees for the calendar year in which final wage payments occurred. Also, file Form W-3, Transmittal of Income and Tax Statements, to transmit Copy A to the Social Security Administration.”
After filing final tax returns and making required payments, the business owners should cancel all tax accounts and identification numbers (e.g., employer identification number (EIN).
Some state employment final tax paperwork may also be required, plus canceling of state payroll accounts.
11: Close Business Bank Accounts
If a sole proprietorship or partnership has opened business bank accounts, they will need to close them after completing company transactions. Likewise, it’s important to cancel any credit cards and other financial accounts used strictly for business purposes or created using a business’s fictitious name.
Do It Right With CorpNet
Time flies…and it goes incredibly quickly when there’s limited time to take care of all the details involved in closing a business. Fortunately, my team of filing experts at CorpNet is here to help streamline some of the tasks for you as you finalize your sole proprietorship or partnership.
Get in touch with us now to get on the right track to officially closing your business by the year’s end.
