It has been a rough few years for businesses across the country, but especially so for small businesses. From COVID-19 to inflation, companies of all sizes have had to close some or many of their locations. Whether you’ve had to close down entirely or shutter locations in other states, it’s crucial you legally close your business so there are no repercussions down the road. In many cases, this means you need to take action before we close out the 2023 calendar year.

I want to help keep you and your business in compliance. If you’ve had to close part of all of your operations, here are five critical steps you need to tackle so that your business is compliant with closures, dissolutions, and withdrawals.

1: Vote On It

For a Sole Proprietorship with no employees, closing a business is as simple as starting one. Close up shop, pay off your debts, and let your customers and vendors know. However, if you have partners (even silent ones) or you own a C Corporation or LLC, you should have documented the method of closing in your business’s partnership or operating agreement. The first step must involve getting everyone to agree on the closure. You need to hold a formal vote, documented in the meeting’s minutes, with signatures from all partners and board members.

In addition, if the business is a corporation and has issued shares, two-thirds of the voting shares must agree on closure. LLC rules vary by state, so check with the states where you have business locations for requirements for who needs to agree to closure.

2: Filing the Paperwork

After an official vote for dissolution, you must file the proper forms with the Secretary of State’s office in the state where your business was formed. Similar to filing Articles of Organization or Articles of Incorporation when you started your business, to close your business, you must now file papers called Articles of Dissolution (also called Certificate of Termination or Certificate of Dissolution). If you fail to complete this step, your business is still open in the eyes of the state, and you still must file the required annual paperwork and pay any fees.

What if you have locations in other states? Doing business in another state means you have filed for a foreign qualification in that state. Foreign qualification is required when:

• The business has a physical presence (office space, warehouse, or retail store) in the state.
• You or your staff have conducted in-person meetings with clients or customers in the state.
• Your business is structured as a Limited Liability Company (LLC), C Corporation, or a Limited Partnership (LP).
• Your business has employees living/working in the state.

Your business’s state of organization is the only state where you need to file for dissolution. However, you need to start withdrawal proceedings to cancel out-of-state registrations. Withdrawing a foreign business typically includes filing a withdrawal application and paying a filing fee. Fees vary from state to state.

It is also vital to cancel all registrations, permits, licenses, and business names acquired in the states you do business. Usually, the act of filing dissolution paperwork automatically cancels your business name in the state. However, if your business registered a fictitious business name (DBA), you may need to file a separate cancellation on the DBA.

Whether you should cancel a trademark after a business closure is more complicated, but if you decide to keep the trademark, you’ll need to transfer ownership to the new business or owners. More details are available through the United States Patent & Trademark Office (USPTO) or CorpNet can help.

3: Remain in Good Standing

Before you can dissolve or withdraw your business from the states where you do business, your company must be in good standing, which means you have continued to file the proper paperwork on time. It also means you have settled the company’s financial obligations, such as paying vendors, employees, payroll taxes, as well as sales and use taxes. If for some reason, you don’t have the money to pay off the company’s debt, you’ll most likely need to file for bankruptcy, and the courts will settle the assets. Corporations and LLCs must pay off creditors before any funds or assets can be distributed to shareholders.

4: Inform the IRS

Although your Federal Tax ID Number (EIN) forever represents your business, you should let the IRS know you want to close your business account. To close your business account, send the IRS a letter including the entity’s complete legal name, the EIN, the business address, and the reason you wish to close your account. If you have a copy of the EIN Assignment Notice issued when your EIN was assigned, include that in the letter. If the business is structured as a corporation, you need to file Form 966 for Corporate Dissolution or Liquidation.

5: File Taxes

Don’t wait to file your final tax return. Once the business is dissolved, file any final wage reports, capital gains and losses, employment tax returns, and be sure to check the box labeled “final return.”

If you’re thinking of closing your LLC before the year ends, you may be feeling overwhelmed. And you are probably wondering what you must do to exit the business without leaving any loose ends behind. Indeed, there is more to shutting down a business than merely ceasing to sell products and services. The exact actions a Limited Liability Company’s members must take depend on where the business is registered, whether it has employees on its payroll, and other factors.  It can be tricky to determine all the requirements, so LLC owners (a.k.a. members) should carefully research the things they must do. I also recommend getting guidance from an attorney, accountant, and tax advisor so that no legal and financial details are overlooked.

Skipping any essential tasks when closing out an LLC could mean LLC members will remain responsible for various filings, fees, and other ongoing compliance tasks. States expect LLCs registered in their jurisdictions to comply with all legal requirements until the business is officially dissolved. Procedures for shutting down an LLC entity vary from state to state. Members should also review their LLC’s operating agreement, which should explain the company’s rules for handling the various aspects involved in closing.

Below, I’ve listed some general steps that LLCs must complete when winding down their business.

1. Confirm the Company Is in Good Standing

Before dissolving an LLC from the states where it conducts business, the business entity must be in good standing in those areas. Have the LLC members kept up with ongoing business compliance tasks or has it fallen behind on filing reports and paying fees?

If an LLC has fallen out of good standing, it will need to follow the state’s rules for restoring that status (possibly even filing for reinstatement) before its owners can proceed with dissolving the entity.

2. Hold a Vote to Dissolve the Business

Depending on the state’s laws and the rules outlined in the LLC operating agreement, it may require a majority vote or unanimous consent to approve the dissolution of the company. During the meeting to vote on this significant decision, the results must be captured in meeting minutes. Even if the company is a single-member LLC, holding a meeting and recording a vote (yes, with just that one member!) is advised — and may be required.

3. File LLC Articles of Dissolution

Limited Liability Companies must file a form called Articles of Dissolution (which might instead be called Certificate of Dissolution or Certificate of Termination) with the state’s Secretary of State office (or other agency per the state’s rules). It’s critical to complete the form correctly to prevent processing delays that could result in unexpected costs and other issues.

If an LLC had requested foreign qualification to do business in states other than its home state, it must notify those states. Then, it can cancel any registrations, licenses, permits, business names, and anything else it may have applied for in those jurisdictions. Different states have different rules for what’s required to withdraw from doing business there. Typically, removing a foreign LLC involves filing a withdrawal application and paying a filing fee.

Dissolution of an LLC usually is considered effective on the date specified during the LLC member vote. The business may continue to wrap up its affairs (e.g., notify vendors, customers, creditors, liquidate and distribute its assets, etc.). In some states, businesses may specify an effective dissolution date up to 180 days in the future. However, backdating dissolution to an earlier date is not an option.

Note: Filing dissolution paperwork will automatically cancel an LLC’s legal business name in the state. However, if the LLC had filed a fictitious business name (a.k.a. DBA), it may have to take additional measures to cancel that name.

4. Notify the Company’s Stakeholders

Some states require that LLCs notify their creditors and vendors of their dissolution before filing Articles of Dissolution. Also, some states require that businesses publish notice of their dissolution in a newspaper or other publication within a certain period of time. These tasks help ensure that the general public and creditors are aware that the company is going out of business.

Of course, it’s polite to let customers when a business is closing too, so follow up on outstanding accounts receivables and provide notification of changes to your customer’s accounts payable departments.

5. Cancel Business Licenses and Permits

If an LLC has obtained business licenses and permits, members should inform the appropriate licensing agencies that the company is closing. Examples of these include zoning permits, professional licenses (e.g., attorney, registered nurse, accounting, psychologist), seller’s permits, retail food licenses, and salon licenses.

Failure to cancel licenses could mean being on the hook to renew licenses even though the company no longer conducts business activities.

6. File the LLC’s Final Payroll Taxes

If an LLC has employees, it must follow through on its payroll tax registration responsibilities. The company must submit its state payroll forms and pay its taxes (SUI and SIT) after paying its workers for the final time. Companies that don’t have funds to pay their employment taxes in full may be able to set up an installment plan or “offer in compromise” (approval to pay less than the total amount owed to settle the tax debt).

Limited Liability Companies must also issue IRS Form W-2 (Wage and Tax Statement) to each employee for the calendar year when they have final wages and salaries. Similarly, they must issue IRS Form 1099-NEC (Nonemployee Compensation) to independent contractors to whom they’ve paid at least $600 in the year the LLC is closing.

7. Pay Final Sales Tax

An LLC that sells taxable products and services must submit its final state (and local, if applicable) sales tax forms and payments. After that’s done, it may close its sales tax accounts.

8. File Final Income Tax Returns

Business owners also have some ends to wrap up when closing an LLC with the IRS:

• A multi-member LLC must file its final Form 1065 (Return of Partnership Income) for the year the business is closing. According to the IRS, owners should check the box that indicates it is a final return. Likewise, LLC members should check the “final return” box on their Schedule K-1 form (Partner’s Share of Income, Deductions, Credits, Etc.).
• A single-member LLC’s owner must file their Form 1040’s Schedule C (Profit or Loss from Business) with their individual tax return for the year the business is closing.
• If the business has any employees, it must pay its final federal tax deposits and report employment taxes (Form 941, Employer’s Quarterly Federal Tax Return or Form 944, Employers Annual Federal Tax Return).
• The LLC must follow the jurisdictions’ procedures for reporting and paying final income tax at the state and local levels.

There may be various forms required at the federal, state, and local levels, depending on the circumstances. Because the rules and processes vary depending on the jurisdiction and type of business, it’s helpful for business owners to talk with a tax professional for guidance.

9. Sell Company’s Assets

Liquidating and selling an LLC’s assets and inventory can enable the company to generate cash before it closes. A business facing financial difficulty could find this especially beneficial if it otherwise wouldn’t have sufficient funds to cover outstanding debts and creditor claims. Business owners may find a qualified appraiser’s expertise helpful in determining the value of physical assets (like furniture, equipment, etc.). Also, intangible assets (such as trademarks, copyrights, customer lists, and patents) should not be overlooked as opportunities to generate income for the dissolving LLC. It can be helpful to discuss intangible assets (their value and the process for transferring them) with an intellectual property attorney.

10. Pay the LLC’s Business Debts

Before wrapping up operations, an LLC should pay off what it owes to vendors, suppliers, and creditors. If the money isn’t there to pay what’s owed in full, it may be possible to negotiate the final payment amount. The expertise of an attorney can be helpful when navigating the state’s laws regarding claims settlements.

11. Distribute the Remaining Assets

If an LLC has multiple members, it may distribute the assets left after the business has paid its debts. The LLC operating agreement should provide details on how the company should divide its assets among its members.

12. Keep Business Records for Reference

For years after an LLC closes, its members might face questions or audits. Therefore, it’s crucial for members to retain the LLC’s (and their individual) records that pertain to the company’s activities, forms, and transactions in a safe place where they are readily available if needed. Among the critical documentation: tax returns and payment records, financials, payroll and worker employment records, and other business documentation.

The IRS offers guidelines regarding how long business owners should keep records. Generally, seven years is recognized as an acceptable amount of time.

As difficult as it may be to make the decision to close a business, things can become even more challenging if a business’s owners don’t tie up all the loose ends. If you’re thinking of closing your corporation by year-end, realize that there’s more to the process than halting the sale of products and services. Merely stopping business activities doesn’t officially close a company, there are steps that must be taken to legally end the business entity’s existence.

The exact actions a corporation’s owners must take will depend on where the business is located, whether it has employees, or whether it issues shares of stock to its shareholders. Because things can get complicated legally and financially, it’s important for a corporation’s leadership to research everything that will be involved and get guidance from a trusted attorney, accountant, and tax advisor.

If any necessary steps get missed when permanently shutting down a corporation, it could mean its owners will remain responsible for the ongoing business compliance tasks, filings, and fees such as annual reports, tax returns, business license and permit renewals, and more. A state will continue to expect a corporation and its owners to comply with all of its legal requirements until the company has been dissolved officially.

Different states have different rules for ending a business entity’s existence, and a corporation’s bylaws should lay out details for how closing the business should be executed. While the specifics and the order of tasks may vary (that’s why I can’t emphasize enough the importance of talking with legal and tax professionals!), often, the general steps involved are similar.

1. Ensure the Business Is in Good Standing

Before dissolving or withdrawing a corporation from the states where it conducts business, the business entity must be in good standing in those jurisdictions. That means it will have had to keep up with all its ongoing compliance obligations. For example, some states require tax clearance (verification that all taxes have been paid) before a corporation may file to dissolve the business entity. Other business compliance responsibilities that corporations must stay current with to stay in good standing include annual report filings, holding shareholder and board of director meetings, and renewing business licenses.

If a corporation has failed to fulfill its obligations, it must do whatever the state requires to restore a status of good standing (which might involve filing for reinstatement) before it can be dissolved.

2. Hold a Vote to Gain Consensus

Typically, a corporation must hold a meeting and conduct a formal vote to initiate closing the business. The proceedings should be captured in the meeting’s minutes. If a corporation has issued shares of stock to shareholders, two-thirds of the voting shares must agree on closing the business. If shares haven’t been issued, then the usual rule is that the board of directors must vote on closing the company. Regardless of who is responsible for voting, the corporation’s secretary should capture the final vote in the meeting minutes.

3. File Articles of Dissolution

Corporations must file Articles of Dissolution (which alternatively might be called Certificate of Termination or Certificate of Dissolution) with the state. This filing is usually done through the Secretary of State’s office, although it might be a different agency depending on the state. It’s crucial to make sure the Articles of Dissolution are completed accurately so that the business may close without delays or issues.

If a corporation was foreign qualified in other states so that it could conduct business there, it would not have to file Articles of Dissolution in those states but it would have to notify the states of its withdrawal to cancel any registrations, permits, licenses, and business names it obtained in those jurisdictions. Withdrawing a foreign business typically includes filing a withdrawal application and paying a filing fee.

Dissolution of a corporation is typically considered effective on the date specified during the shareholder or board vote, but the business may continue to wind up its affairs (i.e. until it has liquidated and distributed its assets). Some states allow businesses to specify an effective dissolution date up to 180 days in the future, however, they do not allow backdating a dissolution.

4. Notify Creditors, Vendors, and Customers

Some states may require that businesses notify creditors and vendors of the upcoming closure before they file their Articles of Dissolution with the state. Also, some states require that corporations publish notice of their dissolution in a newspaper or other publication within a certain period after the effective date of their articles of dissolution. Doing so ensures that the public and anyone the company owes money is aware of the business’s impending closing. That will allow those parties to identify any outstanding debt the company owes them and ensure it is resolved before the business closes.

Besides the fact that it’s common courtesy to let customers know that a business will no longer exist, it’s also beneficial to the corporation if it has outstanding accounts receivable it wants to collect when winding down the company’s affairs.

5. Cancel Business Licenses and Permits

A corporation that has obtained licenses and permits to conduct business should inform the appropriate licensing agencies that it will be dissolved. Filing dissolution paperwork automatically cancels a corporation’s legal business name in the state. However, if a corporation had registered a DBA (fictitious business name), it may have to cancel that name separately.

6. File Final Payroll Taxes

Businesses with employees who previously registered for payroll taxes (SUI and SIT) must submit their payroll forms and pay payroll taxes after paying their workers for the last time. Options, such as an installment plan or “offer in compromise” (approval to pay less than the full amount owed to settle the tax debt), exist for companies that have run into financial difficulties and cannot pay taxes in full. Corporations must also issue a Form W-2, Wage and Tax Statement, to each of their employees for the calendar year during which they pay final wages and salaries. Likewise, they must issue Form 1099-NEC, Nonemployee Compensation to independent contractors to whom they’ve paid at least $600 in the year they’re closing the business.

7. Pay Final Sales Tax

If a company collects sales tax on the products and services it sells, it must submit its final state (and local, if applicable) sales tax forms and payments. It can then close its sales tax accounts per the agency’s instructions.

8. File Final Tax Returns and Close Accounts

When filing federal income tax for the tax year when a corporation ceases to exist, taxpayers must select the “final return” box on their tax return. The business may have to file other IRS forms as well depending on its circumstances (e.g., if the business is being sold).

A corporation’s (and its shareholders’) federal, state, and local income and employment tax obligations may continue until the business closes its tax accounts with the IRS and state and local tax agencies, so the IRS requests that business owners send a letter to close their business account. The information required is the entity’s complete legal name, the EIN, the principal business address, and the reason for closing the account.

Keep in mind that a corporation must file any outstanding taxes and tax returns before the IRS will close an account.

9. Sell the Company’s Assets

Liquidating and selling assets and inventory can help generate cash before a corporation closes its doors. This can be especially beneficial when a business’s bank accounts will not have sufficient funds to cover outstanding debts and creditor claims.

For physical assets (like property, equipment, and furniture), a qualified appraiser can help establish the liquidation value.  Business owners should also consider their intangible assets, which may include copyrights, trade names, licensing agreements, patents, trademarks, and customer lists. Intangible assets may be in demand and sold to another business.

It can be helpful to talk with an intellectual property attorney to work through determining the value of the assets and transferring their ownership.

10. Pay Outstanding Business Debts

Winding down a business also entails paying off debts to vendors, suppliers, and creditors. If funds are not adequate for settling all money owed, it may be possible to agree on payment in a lesser amount. It’s highly advisable to enlist the help of an attorney to navigate the state’s laws regarding settling claims.

11. Distribute Remaining Cash and Assets

After a company has paid all its final taxes, payroll, debts, and fees, it may usually commence with dividing its remaining money and property to its owners. For a corporation, this usually involves allocating assets among its shareholders based on the number of shares that they own. The corporation’s bylaws will (hopefully!) detail how everything is divided among the company’s owners.

12. Retain Business Records

Because questions about a business’s taxes, financials, employment records, etc. may arise years after it has closed, it’s important to retain records in a safe place. In the event of an IRS audit or legal investigation, having records readily available can alleviate a lot of work and stress. The IRS offers some guidance on how long business owners should keep records. Typically, seven years is recognized as a prudent amount of time. Better safe than sorry!

Owning a small business is the American dream. But sometimes, despite all the hard work, that dream turns into a nightmare and businesses don’t make it. Understanding why small businesses fail can be as crucial as knowing the secrets of those that succeed.

Being aware of the signs of business failure can help you spot when you need to take immediate action to keep your business going. Here’s what to avoid.

1. Lack of Experience

The challenge: Many new entrepreneurs have no prior business experience or are unfamiliar with the industry of their startup. They may not understand the basics of running a business, such as marketing, finance, and accounting, or the specific needs of this particular industry. This lack of experience can lead to mistakes that can ultimately sink a business.

The solution: Get experience. Before you start your own business, get experience working for someone else. This allows you to learn the ropes and make mistakes without risking your own money. Another option for gaining experience is to take some business courses online or in person. Chances are you can find just what you need at a local community college for little cost.

2. Lack of Market Research

The challenge: Many small business owners are so enthusiastic about their business idea because it’s based on their passion or a hot trend that they jump into starting without doing any research. However, passion doesn’t always translate to demand, and trends may actually be fads with little staying power.

The solution: Before investing time, energy, and money, it’s crucial to assess the market. Is there a long-term demand for the product or service? Who are the competitors? What differentiates your business? Comprehensive market research is the foundation upon which successful companies are built.

3. Poor Planning

The challenge: Many small business owners skip the business planning phase, thinking it’s only for large corporations or startups seeking investors. That’s faulty thinking. Writing a business plan ensures you don’t overlook crucial steps like market research (see #2) or financial projections.

The solution: Business plans are roadmaps. They help you set clear goals, determine your target audience, identify potential challenges, and establish a clear vision for the future. Business plans should include your goals, strategies, and financial projections. Without a business plan, it’s easy for a business to veer off course and fail.

Whether a detailed document or just a few pages, a business plan can make the difference between aimless wandering and a strategic journey.

4. Poor Cash Flow Management

The challenge: Insufficient cash flow is one of the primary reasons why small businesses fail. Many new business owners underestimate the cash needed to start and run a business. Overhead costs, unexpected expenses, and slow-paying clients can lead to cash flow challenges.

The solution: Regularly monitor your cash flow. Use financial tools and software to forecast and track income and expenditures. Collect outstanding invoices. Keep a six-month emergency fund, and be cautious with large, unnecessary expenditures, especially in the early stages.

5. Not Embracing Digital Solutions

The challenge: Let’s face it, we’re living in a digital age. You cannot ignore or underestimate the power of online visibility and digital marketing.

The solution: A strong online presence can significantly boost brand awareness and sales from Google searches to social media interactions. Invest in a professional website, engage with your customers on social platforms, start an online newsletter, and consider online advertising based on your target audience. Being a digital company also includes accepting digital payments like Apple or Google Pay.

6. Getting Stuck

The challenge: The marketplace, technology, and consumer preferences constantly evolve. Businesses that cling to outdated practices or fail to adapt often get left behind. Learning to pivot was key for survival during the COVID-19 pandemic, but it’s just as crucial today.

The solution: Stay current with consumer and industry trends. Ask your customers for feedback and monitor comments on your social networks and ratings and reviews sites like Yelp. Be willing to pivot when necessary. This might mean upgrading technology, rebranding, or even changing your business model.

7. Neglecting the Customer

The challenge: Unhappy customers are a key reason why small businesses fail. Some business owners spend so much time scaling or managing operations that they overlook taking care of their customers.

The solution: Prioritize customer service. Satisfied customers become loyal and more likely to refer their friends and colleagues. Handle complaints quickly (and politely), respond to feedback, always aim to exceed customer expectations, survey your customers to find out what they think you’re doing right or wrong, and be responsive to their suggestions.

8. Not Building a Strong Customer Base

The challenge: Just because you’re earning enough money to pay your bills or make a profit doesn’t mean your business is on solid ground. Too many small businesses depend on one or two clients for most of their sales. This is dangerous behavior and one of the reasons small businesses don’t succeed.

The solution: Diversify your client base, so no one customer should account for most of your sales. A diversified client base reduces your risk in case your primary customer cancels their contract or goes out of business. Diversifying your customer base can help you reach new markets and grow your business. By targeting different types of customers, you can expand your product or service offerings and increase sales.

9. Opening in the Wrong Location

The challenge: Opening a business in the wrong location can quickly put you out of business. Don’t pick a storefront or office based solely on the cost of rent.

The solution: Factors to consider when choosing the best location for your small business where your customers live or work, street traffic, access to public transportation, adequate and well-lit parking, the space you need now and for the next few years, distance from competitors, condition of the building, proximity to other businesses that attract customers, and access to a skilled workforce.

10. Not Asking for Help

The challenge: Don’t think asking for help is a sign of weakness or ignorance. It would be impossible for a new business owner to know everything about running a business.

The solution: You can get low- or no-cost advice from the Small Business Administration (SBA) and its resource partners, the Small Business Development Centers, and SCORE.  Trade organizations, local chambers of commerce, and city or county organizations may also provide advice and mentorship. If you need more assistance, consider hiring a business coach.

Other Reasons Small Businesses Fail

Being aware of the risks of business ownership can help you avoid failure. It’s also essential to set realistic goals. You’re not going to become a millionaire overnight and this means being patient.

Entrepreneurship is not easy. There will be times when you want to give up. But don’t give up on your dream. And remember, every setback or failure is a lesson, showing you what not to do the next time. Embrace the learning, adapt, and forge ahead.

In the world of entrepreneurship, change comes in many forms and it is inevitable. People who were once robustly passionate about their business endeavors may find new opportunities or face life situations that lead them to focus on other priorities. What can you do if that happens to members of a Limited Liability Company (LLC)?

LLC members might decide to transfer the ownership interests in their company for a variety of reasons. Ownership transfer can occur when new LLC members are added, one or more existing LLC members want to sell their shares of ownership, or an LLC member dies or divorces. Let’s review a few factors that will impact this process.

Key Considerations to Review

Partial Transfer vs. Full Transfer

Basically, there are two ways that LLC ownership gets transferred:

• Partial transfer of ownership interest – This is when only a portion of the ownership is being transferred. In other words, one or more LLC members sell their ownership interests, but other LLC members retain theirs.
• Full Transfer of ownership interest – If the LLC member(s) decide to transfer all ownership interests in the company to someone else, they are essentially selling the LLC.

Partial transfers tend to be less complicated than full transfers, which have more complex legal and tax consequences.

Existing vs. No Operating Agreement

An LLC operating agreement typically lays out the rules and procedures for transferring a company’s ownership interests. Ideally, the agreement will describe what must happen when a member dies, retires, leaves the company for other reasons, or is involuntarily removed.

Some operating agreements require that departing members must first offer their interests to other members before they may sell them to an outside party. An operating agreement might also have requirements for handling the valuation of a member’s ownership interests.

What if there are no provisions in the LLC operating agreement for transferring ownership? In that case, business owners should check their state’s laws for any rules related to selling ownership shares of an LLC.

Buy-Sell Agreements

Many multi-member LLCs have a buy-sell agreement within their operating agreement. A buy-sell agreement is a standalone document that addresses the transferability of LLC membership interests. A buy-sell agreement is a contract between the LLC owners that defines various conditions related to selling LLC ownership interests.

These documented conditions might include:

• What events or circumstances trigger the sale of membership shares
• Who may purchase LLC membership interests and whether approval of the LLC membership is required
• How to determine the selling price of the interests
• How to fund the sale (if other LLC members are buying the ownership interests)

LLCs that don’t have a buy-sell agreement can add one by drafting an amendment to their operating agreement and voting to approve it. Alternatively, they can follow their state’s rules or enter into an agreement with the buyer at the time of sale.

Note that in some states, LLC members must dissolve their entity and form a new one when changing ownership if there are no buy-sell provisions in the operating agreement.

Valuation and Purchase Price

Usually, the LLC operating agreement or buy-sell agreement will state how to determine the value of the ownership percentage being sold. Valuation steps might include having a third party assess the net worth of the company so the price for ownership interests can be calculated.

Transferring Ownership When Adding New LLC Members

The sum of all members’ ownership percentages in the LLC must equal 100%. The percentage of ownership might be determined by the members’ initial financial and property investments in the LLC, their degree of involvement in managing the LLC, or other factors.

An example scenario where a multi-member LLC with three members might have ownership allocated as follows:

• Member 1 – 30%
• Member 2 – 40%
• Member 3 – 30%

Suppose the three members agree to bring on a fourth member. In that case, they would need to transfer a percentage of their ownership interests to the new member so that the total percentage does not exceed 100%.

Tax Implications of Selling an LLC

Transferring ownership of an LLC has tax consequences, which may be confusing and complicated. Therefore, it’s important to talk with legal counsel and a trusted tax expert for guidance.

Whether an LLC is taxed as a Sole Proprietorship, Partnership, S Corporation, or C Corporation will affect the tax liability when transferring LLC ownership interests. Some members might be subject to capital gains taxes, depending on how long they have held an interest in the company. Also, some income from transferring ownership might be taxed as ordinary income instead (e.g., if the LLC owns unrealized receivables, appreciated inventory, or certain types of depreciable real property). In the case of an LLC taxed as a C Corporation, the entity pays the tax rather than the individual owners.

The type of sale (entity sale or asset sale) affects taxes, too. Entity sale (known as a stock sale for LLCs taxed as C Corps), which involves the transfer of ownership shares, is what we’ve been talking about in this article. An asset sale is when the LLC members are selling the LLC’s tangible and intangible assets but not the legal entity.

Steps for Transferring LLC Ownership

As we’ve discussed, there’s no universal formula for transferring ownership of an LLC because every scenario is unique. However, the steps below represent the tasks and responsibilities typically involved.

1. Reach out to an attorney and tax advisor for guidance through the process to help ensure you execute the transfer legally and understand its tax implications.
2. Review the LLC operating agreement and buy-sell agreement to determine the terms and conditions for selling ownership interests in the business. If no provisions for the transfer of ownership exist, check the state’s laws.
3. Determine the asking price for the ownership interests. This may require the help of a business valuation expert to determine the market value of the business.
4. Create a sales agreement to record the terms, conditions, price, and other details about the transaction.
5. Obtain the required approval of LLC members and execute the sale.
6. File Articles of Amendment to update the LLC’s articles of organization on file with the state. This will ensure the state has an accurate account of who owns the entity.
7. Update the LLC operating agreement to remove members who have sold their ownership interests and document new members’ rights, contributions, and ownership percentages.
8. Issue a new LLC membership certificate to the new member(s).
9. File IRS Form 8822-B (Change of Address or Responsible Party) to notify the IRS if the LLC’s responsible party for the entity has changed — i.e. if a member who transferred their ownership interests and left the LLC was serving in that role. The IRS requires this within 60 days of the membership change.
10. If the LLC’s communication contact on file with its registered agent is leaving the company, appoint a new one and notify the registered agent. Failing to do so could result in important notices falling through the cracks!
11. Notify your bank and other financial institutions about changes to the individuals authorized to access the LLC’s accounts and make transactions on the company’s behalf. I recommend researching your financial institution’s policies and procedures before the ownership transfer takes place.

There may also be other tasks depending on the LLC operating agreement, buy-sell provisions, state laws, and circumstances triggering the transfer of ownership.

The Details Matters

With so many moving parts potentially involved in transferring an LLC’s ownership interests, be diligent about paying attention to every detail. Remember that the transfer is a legal transaction with tax consequences, so consider seeking the advice of a lawyer and tax professional with experience in helping LLCs through ownership transfers.

Sometimes business partnerships just don’t work out. Whether it’s due to disagreements or because one partner wants to pursue other opportunities, it’s essential to know what your options are when it’s time to split up a partnership. One common scenario is when one partner wants out, but the other partner (or partners) wants to continue the business. In that case, a partner buyout is a likely solution. Knowing the proper way to buy out a business partner will save you time, money, and a lot of hassle in the future. Here’s what you should know about a partner buyout.

The Importance of a Partnership Agreement

In most cases, the terms and conditions of a partner buyout are documented in the partnership agreement created when the Partnership is formed. However, if a partnership agreement does not exist, it may be challenging to keep the business going—especially if the courts and lawyers get involved.

A buyout is a purchase of one partner’s company assets by another partner(s). The partner leaving the business wishes to be paid for their portion of the assets. Unless the agreement dictates something differently, a company valuation must be conducted—just as if the entire company is being sold. A professional valuator determines a business’s value by using industry standards and applying valuation approaches based on assets, liabilities, income, and the current market.

A goodwill contingent may also be applied, which means that because the company is a profitable concern and has more value than is apparent just considering its earnings, a valuator may add a goodwill buyout payment to the total buyout amount.

Once it’s determined that the partner wants to leave the business and you’ve agreed on the company’s value, the partnership agreement should specify how the ex-partner will receive the buyout money. Both parties should agree on how the ex-partner should be paid and for how long a time. For example, the ex-partner may receive regular payments over several years. Or, if the ex-partner wants a lump sum of cash, the remaining partner/s may need to take out a loan to complete the buyout.

Making the Partner Buyout Legal

Once the buy-sell agreement is completed and signed by all parties, who else needs to know? In general, who needs to know is determined by the Secretary of State in the state where the business is located. Most states require all partners to sign a statement of dissolution, but not all states require that statement to be filed.

Most states have adopted the Uniform Partnership Act (UPA) and the Revised Uniform Partnership Act (RUPA), which dictates the regulations applied to Partnerships. Under UPA and RUPA, a partner can withdraw from a Partnership at any time (with proper notice). Still, UPA and RUPA have different rules about what happens to the Partnership after a partner leaves. Under UPA, when a partner leaves, the Partnership is automatically dissolved. For the company to keep going, it must first go through dissolution, which can then be reformed as a Partnership or a different business structure. Under RUPA, a partnership may conduct a partner buyout without dissolving the Partnership.

The process also differs depending on the business structure of the partnership:

• Two-person General Partnership – In a two-person General Partnership, the business is no longer a Partnership once one partner leaves. Therefore, the remaining partner may transition to a Sole Proprietorship or file as a legal entity with the state. A single owner can register as a single-member LLC or a C Corporation.
• Limited Liability Company (LLC) – The company’s operating agreement in an LLC should dictate how and when a partner/member can be bought out. An LLC operating agreement is a document stating the members’ rights and obligations, the distribution of income, and the process for a departing member.
• Limited Partnership (LP) – A Limited Partnership (LP) has both general and limited partners. The general partners bear most of the company’s liabilities and run the daily operations, while the limited partners invest money into the company but do not participate in its operations. Because limited partners don’t participate in business management, a limited partner can leave the company without causing the Partnership to dissolve.
• Limited Liability Partnership (LLP) – A Limited Liability Partnership (LLP) is a business structure used primarily by professionals like attorneys, accountants, physicians, engineers, dentists, and architects. A business must have two partners to form an LLP, and the partners must usually be licensed in the same profession. The requirements and rules regulating LLPs vary by state, so check with the secretary of state to know how to buy out a partner in an LLP.
• C Corporations – Although C Corporation owners are considered employees and not partners, a change in ownership should also be filed with the state. Check with your secretary of state to see what forms should be filed, or CorpNet can do it for you.

Tax Implications

If a Partnership is dissolved and a new company is formed, the Internal Revenue Service (IRS) requires the company to obtain a new Federal Tax ID Number or Employer Identification Number (EIN). However, if the company continues as an LLC or corporation and does not change its name, it does not need a new tax ID number.

Also, Partnerships must file IRS Form 8308 to report the sale or exchange by a partner of all or part of a partnership interest where any money or other property is exchanged.

Wrapping Up Final Details

By default, General Partnerships are legally registered under the partners’ names. Therefore, the business’s name change must be filed with the secretary of state. In addition, if the business changes its DBA (doing business as) name, the company must cancel its current DBA and register a new one. All licenses and permits must also reflect the company’s new name and business bank accounts.

Buying out a partner should not be taken lightly. Talk to your attorney and accountant to make sure the process goes smoothly. And if you need help choosing a new business structure, CorpNet is here to help.

Since a Limited Liability Company (LLC) can have one owner or an unlimited number of members, it’s not uncommon for an LLC to experience the death of one of its members. When that occurs, what happens to the ownership of the LLC?

First, let’s define some important terms:

• Probate occurs when someone dies, and their assets are distributed to pay their liabilities and beneficiaries. Stated another way, probate is a court-led, legal process that begins after someone passes away. The court will distribute their estate to the proper heirs.
• An executor is someone assigned to follow the deceased person’s wishes when they’ve left a will. If there isn’t a will, the court distributes assets according to the state’s rules of succession.
• In an LLC, the business owners/shareholders are referred to as members. An LLC can have one member or multiple members.
• When an LLC is formed, the business may create an operating agreement to outline the rights and obligations of the members, as well as the distribution of the LLC’s income. You are normally not required to create an operating agreement, but it is strongly recommended that you do so.

Now that we provided a basis for the elements of this discussion, let’s move on to covering what really happens to a business when an LLC owner or member dies.

When No Operating Agreement is in Place

When the LLC owner (or members) does not have an operating agreement is not in place, or the operating agreement fails to address the death of the owner, the deceased LLC member’s survivors will be forced to default to the state laws. In this case, the state’s rules will be used to determine how the LLC ownership and membership interests are treated.

An Operating Agreement is Key

As stated above, an LLC operating agreement is a legal contract between the LLC’s owners that outlines the rights and obligations of the members, as well as the distribution of the LLC’s income. One important reason it’s essential to have an operating agreement is to protect the future of your company.

For Example: If a member of your LLC dies, their ownership could be transferred to their heirs as indicated in their will, which could cause problems if the LLC members don’t want to work with the heir/s. If an operating agreement was in place that indicates otherwise, this troubling situation would not occur.

Typically, the LLC operating agreement is created at the time of business formation and it includes the following information:

• Members’ ownership percentages
• How profits and losses will be distributed
• The LLC’s management structure and the members’ roles and responsibilities
• How you’ll make decisions
• Members’ voting rights
• What happens if a member wants to leave the company
• How can the LLC be dissolved

When an LLC has multiple members, all members must sign the document before it is considered effective and valid. That means all of the members would be able to weigh in on the outcome of a member’s death and would be in agreement on what happens next.

If an operating agreement is in place and it provides instructions for the death of a member, the operating agreement will be used for managing the death of a member.

Defining Your Asset Distribution

As noted above, the death of an LLC member results in their company shares (like their other assets) being passed on to their beneficiaries, per the instructions in their will or the state’s succession/inheritance laws. However, that’s not the only option. Nor likely the best one for your business.

If you don’t yet have an operating agreement or your agreement does not include this information, you can, and should, amend (update) your operating agreement as soon as possible. Remember that any procedural changes to an operating agreement must be voted on and agreed to by all members of the LLC.

Since an operating agreement is a legal document, you can delineate specifically what happens to a member’s shares in the event of their death, which will help you avoid probate.

Operating agreement options for managing the death of a member:

• Shares can be passed on to the deceased member’s beneficiary or beneficiaries. The operating agreement should contain a “Transfer of Membership” clause in which the recipients of the shares are named. This would likely also be noted in the deceased’s will.
• Shares can be purchased outright by the remaining LLC members, with the money going to the deceased member’s beneficiaries.
• The remaining LLC members can purchase shares over time, making regular payments to the deceased member’s beneficiaries.
• Shares can be bequeathed to a third party.
• The deceased beneficiaries can inherit shares, but they are not granted voting rights or any managerial authority.

Finally, the operating agreement could also dictate that the LLC be dissolved upon the death of a member. In this scenario, the remaining members may regroup and start another business or dissolve the LLC and distribute all the remaining assets.

Options for single-member LLCs:

• Typically, a single-member LLC is immediately dissolved when the sole member passes away, and the assets are distributed to their beneficiaries per their will or by state law.
• However, at startup, the operating agreement may be written to include a successor so the company can continue. The successor can be a person or organization.

Since the company’s home state regulates LLCs, checking your state’s LLC laws regarding succession is crucial.

The Revised Uniform Limited Liability Company Act (RULLCA)

Currently, 23 states have enacted some version of the Revised Uniform Limited Liability Company Act (RULLCA) or have legislation pending to do so. The RULLCA is an update of the 1996 act, which originally permitted the formation of LLCs, and provides consistent rules and procedures for LLC regulation.

Under the RULLCA, what can be transferred after the death of an LLC member is limited. For example, members can only transfer financial interests in the LLC. They cannot transfer managerial rights.

In addition, rights to actively participate in the LLC business are not granted without the approval and support of the other members.

These states who have enacted the RULLCA include:

• Alabama
• Arkansas
• Arizona
• California
• Connecticut
• District of Columbia
• Florida
• Idaho
• Illinois
• Iowa
• Missouri
• Minnesota
• Nebraska
• New Jersey
• New Mexico
• North Dakota
• Pennsylvania
• South Dakota
• Utah
• Vermont
• Washington
• Wisconsin
• Wyoming

Dissolution is the act of formally dissolving (closing) a business entity with the state. It involves far more than just stopping to sell products and services. Dissolution is a process for wrapping up all legal and financial aspects of the business and legally terminating its existence in the state(s) where it is registered. Business owners, and professional services providers who offer accounting, tax, or legal services to entrepreneurs, should know how to legally dissolve a Corporation or LLC. Just like life, running a business has its share of ups, downs, and surprises—and there are many different reasons why someone would want to close a business.

Let’s dig into some of the details involved with the dissolution of a Corporation or LLC.

Top Questions for Business Owners

How Do I Legally Dissolve a Corporation or LLC?

To file for dissolution in a state, business owners must file Articles of Dissolution (also called Certificate of Dissolution) with the Secretary of State office or comparable state agency. Filing Articles of Dissolution will allow you to end your business entity permanently. Before a state dissolves a company, the business must file all outstanding state fees, reports, and taxes.

It’s crucial to make sure the Articles of Dissolution are completed accurately so that the business may close without delays or issues.

Do I Need to Close My Business Before Year-End?

Deciding if you should close a business leads to the question of when should you dissolve a corporation or your LLC. The ideal time can vary depending on the situation. Closing before the end of the year offers the advantage of avoiding fees and tax obligations for conducting business in the new year.

For that reason, many business owners try to wrap up dissolution tasks by year-end.

Does this Process Vary by LLC or Corporation?

The process for dissolving an LLC and Corporation is slightly different.

Before filing Articles of Dissolution, here’s what LLCs and Corporations must usually do:

• Typically, an LLC must hold a meeting with its owners (known as members and have them vote on closing the company. The record of the final vote must be captured in the meeting minutes.
• In most states, if a C Corporation issued shares of stock to shareholders, it needs ⅔ of the voting shares to agree on the dissolution. Generally, if the company did not issue shares, then the corporation must hold a meeting with its Board of Directors and ask them to vote on closing the company. In either case, the record of the final vote must be captured in the meeting minutes.

Does the Process Vary by State?

Yes, it does. It’s critical to check with the appropriate state agency (usually the Secretary of State office) to determine the requirements for dissolving an LLC or Corporation in the state(s) where the business is registered.

What if My Business is a Partnership?

In the case of a partnership, business owners must inform the IRS that their partnership is dissolving. When submitting Form 1065 (U.S. Partnership Return of Income), they must check off the box that says it is the final return. They should complete the form by the 15th day of the third month after the tax year ends.

What Happens to My Existing Customers and Contracts?

Great question! Before you dissolve a corporation or LLC, it’s important for a business to collect any outstanding accounts receivables and to notify customers that the company will be dissolving. If any contractual obligations remain, a business owner must deal with those. This may require the assistance of an attorney to ensure no loose ends get missed in the process.

Do I Need to Notify Creditors?

Yes, it’s important to alert creditors, vendors, and other individuals and entities to whom the company owes money. That will allow those parties to identify any outstanding debt the company owes them and ensure it’s resolved before the business closes.

Can I Dissolve a Business With Debt?

When a business has outstanding debts that it cannot pay, the company may be liquidated or close under administrative dissolution by the state. With liquidation, the company sells its assets to pay off debts before it closes. Partners, members, or directors, must approve the liquidation, establish a plan, and notify creditors. The guidance of both an accountant and an attorney can help ensure a smooth process. Whereas liquidation is voluntary dissolution, administrative dissolution usually occurs involuntarily when the state dissolves a business after numerous failed attempts to get the business owners to settle their deficiencies.

What Happens to My Business Debts?

If a business cannot pay off its debts before closing, outstanding financial obligations become uncollectable debt for the creditors that are owed money. If business owners have personally guaranteed business loans or debt, they may find themselves sued by creditors, thus exposing their personal assets for repayment of the business’s debts.

What Happens to My Employee Identification Number (EIN)?

The IRS requests that business owners send a letter to close their IRS business account. It should include:

• The complete legal name of the entity,
• The EIN,
• The business address,
• And the reason for closing the account with the IRS.

If possible, they should also include a copy of the EIN Assignment Notice that the IRS issued when assigning the EIN.

Any outstanding taxes or tax returns due must be filed before the IRS will close an account.

Is there a Checklist I Can Follow?

As I shared earlier, the process to accomplish the dissolution of a Corporation or LLC varies from one state to the next and by business entity type. Below is a handy checklist of the typical steps involved when dissolving a business:

1. Dissolve the business structure – Hold the necessary meetings and votes to obtain approval; record the results of those votes in meeting minutes.
2. File Articles of Dissolution – Let CorpNet help you by preparing and submitting the form.
3. Collect any outstanding accounts receivables – Collect money owed to the business from customers. If this might be difficult or too time-consuming, you may want to explore selling your accounts receivable to a factor.
4. Sell the company’s assets – Selling assets and inventory can help business owners generate more cash before they close their doors. Besides holding a sale at your location, Craigslist may be a viable option for selling office equipment, furniture, and supplies. Another way to sell assets is by holding an auction to attract other business owners.
5. Pay off outstanding business debts –  Plan to settle outstanding accounts payables with your vendors, suppliers, and creditors. If you can’t pay everything, talk with your attorney about your options.
6. File final payroll taxes – Businesses with employees must submit their payroll forms and pay payroll taxes after they’ve paid their employees for the last time. Talk with your attorney and accountant about filing Form 656 with the IRS to make an Offer in Compromise if you’re unable to pay your payroll taxes in full. Another option that may be worth exploring is setting up a payment installment plan by filing IRS Form 433-A.
7. Pay final state sales tax obligations – If your company collects sales tax on the products and services you sell, submit the final state sales tax forms. Then, ask your state tax agency what you must do to close your sales tax account.
8. File final income tax returns – There’s usually a final return box that needs to be checked off by LLCs and Corporations that are closing and making a final return. A tax professional can help ensure that final returns are completed correctly. Another form that applies to some businesses is Schedule K-1, for reporting shareholder allocations (and losses) for partners.
9. Cancel business licenses and permits – All licenses and permits issued by federal, state, county, and local agencies should be canceled. Otherwise, the business may still be on the hook to pay them.
10. Distribute cash and assets to business owners – After all debts, taxes, payroll, loans, and fees are paid, a business will usually have the green light to distribute the remaining money and property to the business owners. LLC owners typically get distributions proportional to their share in the business. Corporations allocate assets among their shareholders based on the number of shares that they own.

Additional Year-End Tips for Accountants, Advisors, and Business Consultants

Those of you who help entrepreneurs with the legal or financial aspects of their companies may have some clients that can benefit from a business compliance checkup before this year wraps up. Below are some ideas for how you might assist them.

Help Your Clients Prevent Tax Filing Fees and Penalties

Are your clients behind on filing returns or in paying any of their tax obligations for the year? Now is a good time to take stock of where they stand. If they’ve fallen behind, they must understand the sooner they catch up and become current, the fewer fees and penalties they’ll face.

Validate Your Clients Are in Good Standing

When your client is in good standing in a state, it means that their business is legally registered with the state and authorized to conduct business there. Good standing requires following the state’s rules for conducting business in its jurisdiction (e.g., paying taxes, filing the necessary reports and other documents, obtaining the required licenses and permits, and possibly fulfilling other requirements). A state’s business filing agency (typically the Secretary of State office) can confirm or deny if a business entity is in good standing. If your client is thinking of applying for a loan or applying for (or renewing) licenses and permits, they may need to request a Letter of Good Standing from the state.

Validate Clients Have Completed Their Annual Compliance Filings With the State

The annual business compliance filings a client must submit and pay for depend on the state and the business structure. Some common examples of annual compliance filings include:

• Annual report or biennial statement
• Annual meeting minutes
• Franchise tax
• Articles of Amendment (in the event of major changes to the company, such as an address, name, membership, or new shares)

CorpNet’s free Compliance Portal can help your clients stay on top of what filings must be completed and when they are due.

Help Clients Formally Perform Name Changes with the State

If a client wants to change the business name before the end of the year, the process and amount of time it takes to accomplish it will depend on the state and the business entity type. I’ve recently written an article with details about what’s involved in making a business name change.

Validate Your Clients Have the Proper Business Licenses and Permits in Place

Some licenses and permits expire, so it’s critical to make sure clients have renewed—or plan to renew— whatever is required in their state. Operating without the proper licenses and permits is illegal. Check with the appropriate state, county, and local agencies or consider CorpNet’s Business License Service Packages to identify what clients need.

Convert Clients to the Correct Business Entity

Before the year ends is an ideal time to consider if the business structure a client has chosen is still the ideal option. A business’s situation can change as it grows and evolves. For tax or liability reasons, converting to a different entity type may prove advantageous. It’s wise for your client to seek professional tax, accounting, and legal insight before deciding on a business entity change. After your clients have the expert advice they need to make an informed decision, CorpNet can help with filing the business entity conversion.

Help Clients Get Reinstated for Noncompliance or Prior Dissolution

If you have a client whose company has been placed in Non-Compliant status or administratively dissolved by the state, CorpNet can assist with reinstating them. Reinstatement is a legal filing to officially bring an LLC or Corporation back into good standing and in active compliant status.

Enroll in the CorpNet Partner Program to Help Your Clients and Open a New Revenue Stream for Your Business

The CorpNet Partner Program is cost-free to participate in, and it allows you to generate additional revenue for your company. You have two options, each providing a unique way to boost your income potential:

• Become a CorpNet Reseller – Offer our business formation and compliance services to your clients under your brand. You get wholesale pricing and then sell our services to your clients at retail rates. We do all the work as your silent fulfillment partner.
• Become a Referral Partner – Refer your clients to us for their business startup and compliance needs. You send us the business, and we send you a commission check.

Whether you’re a business owner closing a Corporation or LLC (or a professional in an advisory role helping entrepreneurs navigate changes), having the right resources by your side makes everything easier. At CorpNet, my team of filing experts will make sure your dissolution forms get completed accurately and on time.

If you’re planning to move your business to another state or close it altogether, there’s a process you must follow, which varies by the structure of the business. It may seem a bit complex, but we’ll simplify it for you.

Feel like it’s too late to close your business and/or move it to a new state this year? Don’t worry; you can still make it happen. Here’s the right way to process a business dissolution and legally move your business to a new state.

Closing a Business

The steps for business dissolution depend on the legal structure of your business. Let’s look at the steps for each structure.

Sole Proprietorships

Sole Proprietors are “non-entities,” which means they have no legal separation from the business owner and are not registered with the state. Therefore, dissolving a Sole Proprietorship is relatively uncomplicated. After letting customers and vendors know you plan to close the business, make sure you pay off your debts, close business bank accounts, and file your final tax returns. The sole proprietor must also cancel any business licenses and permits. Since Sole Proprietors who operated their businesses using a DBA (Doing Business As) needed to register that name with the state, they must file the correct form to cancel the DBA in their state.

Partnerships

Although Partnerships are also not registered with the state, a few more steps are needed to close a business. To close a Partnership, all partners must agree to dissolve the business. The details of what happens when the business closes should have been documented in the Partnership agreement, including how the assets and liabilities will be divided among the partners. It’s also crucial to check with your state’s Secretary of State about any state regulations regarding Partnership closures.

In addition to filing their final tax returns, Sole Proprietors and Partnerships may need to file IRS tax forms regarding sales of business property and self-employment taxes.

Unlike Sole Proprietorships and Partnerships, C Corporations and Limited Liability Companies (LLCs) must be registered with the state in which they are formed. The formality gives these business structures separate entity status from the owners. Therefore, C Corporations and LLCs exist as legal entities until officially dissolved within the state.

C Corporations

The C Corporation’s home state dictates the process for forming and dissolving a corporation. Typically, the state requires the company to be in “good standing,” which means its ongoing compliance obligations, such as paying state taxes and filing timely corporation documents, are up-to-date.

C Corporations are separate, taxable entities, and owners/shareholders are W2 employees of the corporation—which is why the owners have limited liability from the company’s debts and legal responsibilities. C Corporations must have a board of directors, hold annual meetings, keep meeting minutes, and draft bylaws by which they operate. When deciding on dissolution, the corporation must have a meeting and vote to close the business. The board’s secretary must record the decision in the meeting minutes, and all voting board members must sign the document. If the C Corporation has shareholders, two-thirds of the voting shareholders must sign off on closing the business.

Limited Liability Companies (LLCs)

Likewise, LLCs are legal entities separate from owners and regulated by the state. In a Limited Liability Company, the owners are called members, and depending on state guidelines and the steps outlined in the member-created operating agreement, a meeting must be held to vote on dissolution.

Once the decision to close has officially been made, the following steps for C Corporations and LLCs are the same.

• The businesses must file Articles of Dissolution (also called Certificate of Termination or Certificate of Dissolution) with the state, usually through the Secretary of State’s office.
• The business may be required to settle the company’s debts and notify creditors and vendors about the company’s closure before filing the Articles of Dissolution.
• Some states require corporations to publish an official notice of the dissolution in a print publication or online for a specific time period.
• The companies should cancel any business licenses and permits, file final tax returns, submit final sales tax obligations, and divide up remaining property and assets among the owners.

Moving a Business to Another State

For Sole Proprietors and Partnerships, moving a business means closing it in one state and restarting it in another. However, for C Corporations and LLCs, the businesses can either dissolve the company in their former state and register in the new state or keep the original state as the corporation’s state of formation and file for a foreign qualification in the new state.

Filing for foreign qualification is wise if the company plans to do business in both states. Each state has its own process for foreign qualification, although it can usually be done online by filing for a Certificate of Authority and paying a fee. Keeping the business registered in both states also requires the company to designate a registered agent. Registered agents must have a local address and the authority to accept legal documents and government notices.

If the business is physically moving locations to another state, it’s better to follow the business dissolution process in the former state and register as an entity in the new state.

Alternatively, some states offer conversion or redomestication to change the company’s state of formation. The conversion option alleviates the burden of completely starting over in the new state. After the conversion, the company no longer exists in the former state.

In states that offer conversion, companies must apply for Articles of Domestication or Articles of Continuance. The company typically provides a Certificate of Good Standing and a copy of the application for Articles of Dissolution from the former state. Once approved, the company files Articles of Dissolution in the former state, and the company has officially moved. Only 27 states allow conversion, so check with your attorney or third-party legal counsel to see if your company offers that option.

Someone once told me that a true sign of a successful entrepreneur is the ability to know when it’s time to throw in the towel and move on. One failed business doesn’t define an entrepreneur. Plus, when one door closes, another usually opens.

Closing a business doesn’t just mean selling your assets and calling it a day. You’ve got to go through the requisite steps to ensure your business is legally closed and that you’ve properly wound up your business affairs.  Otherwise, you could be personally responsible for filing annual reports, filing state/federal tax returns, and maintaining miscellaneous business licenses and filings.

Five Steps to Close an Inactive Business

1. Dissolve Your LLC or C Corporation

If you’ve been operating as a C Corporation, Limited Liability Company, or Partnership, all business associates need to vote on closing the business and the final vote should be recorded in the meeting minutes. If shares were issued in a Corporation, 2/3 of the voting shares must agree on the dissolution. If no shares were issued, the Board of Directors must approve to dissolve the company. Specific rules for LLCs vary by state and you should review the dissolution requirements in your state’s Limited Liability Company Act.

After the vote, you’ll need to file a form called “Articles of Dissolution” or “Certificate of Termination” with the Secretary of State’s office in the state where your LLC/ or Corporation was formed.

If you’d like help filing this paperwork, you can contact a CorpNet business specialist to file the paperwork to close your business for you today. We’ll make sure you follow your state’s instructions to the letter, so your dissolution will be processed as quickly and smoothly as possible.

2. Pay Off Any Debts

In order to properly close your business, any company debts must be paid. In most states, an LLC or Corporation must settle its debts before you can distribute any money or assets to the members. If your business doesn’t have enough money to pay off the loans and debts, you should consult with an attorney.

3. Close Your Federal and State Tax Accounts

Just because your business isn’t bringing in any revenue anymore, it doesn’t mean you’re automatically off the hook with the IRS. You’ll need to notify the IRS that your business is no longer operating by closing your Employer Identification Number (EIN). You’ll also need to file your final federal and state tax returns (check the box indicating that this will be the final return). And if applicable, your company’s payroll withholding taxes must be up-to-date. Members or owners can be held personally liable if the business’ payroll taxes aren’t paid.

4. Cancel Any Business Licenses or Permits

Contact the county where your business is located and cancel your business license, as well as your seller’s permit or any other permits you hold. Be active about canceling these things, because you could still be assessed fees and taxes if the county doesn’t know your business is no longer in operation.

5. Notify Vendors, Contractors, and Clients

If you’re closing a business, you’ve most likely already made preparations for stopping work with your customers or clients. However, you should also notify any contractors, freelancers, vendors, and suppliers that you’ve done business with. Don’t just leave them guessing why they haven’t heard from you in a while. By being considerate and upfront with your network, they’ll be more likely to join you on your next project.

Final Thoughts

Walking away from your business is never an easy decision, but closing a poorly performing business can be the smartest thing you’ll ever do. You’re freeing yourself for the next big thing.

Remember to take closing your business just as seriously as you did opening it. Your credit and reputation are at stake. Start your Order of Dissolution online with CorpNet.