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Although everyone aims to succeed when starting a business, the reality is that some entrepreneurs, unfortunately, don’t. It might be because things aren't working out, it might be because you have other things you have to tackle in your life, or it could even be that you're ready to start a different business. Whatever the reason, it is never a fun thing to figure out how to close a business, but turning the page can also provide peace of mind and open up opportunities for new ventures ahead. You never know what's on the other side.
It’s also, of course, necessary from a legal standpoint to physically close a business. Shuttering a company means doing more than putting up a sign that reads “Closed.” Although many entrepreneurs are familiar with the process of starting a company—including incorporating, filing for trademarks and drafting business plans—they might not know the appropriate legal method for how to close a business.
Shutting down your company is called “filing a dissolution.” Doing this allows entrepreneurs to formally close their business with the state. If, for whatever reason, it’s time to close the doors and stop doing business, you’ll need to tie up your loose ends before you can move forward on whatever the future holds.
Here’s what you need to know about how to close a business—properly.
How to close your business in 5 steps
Step 1: Determine if you’ll need to vote on dissolution.
If you need to shut down your company, don’t immediately jump into filing a dissolution. This especially applies to you if your legal structure is a corporation or LLC. And, obviously, that’s because the decision may not be entirely yours.
What we mean is, if they exist, the board of directors at a corporation or managing members at an LLC must first vote and agree on the dissolution. And, in the case of public corporations, votes from shareholders are also counted with the board of directors.
If you can’t secure your vote, then you’ll need to figure out where the dissonance is among your ownership or directors—you can’t close a business without it. But, if you have enough votes in favor of dissolution, then you can move on to the next step.
To sum up this part of the closing a business checklist, if you’re a corporation or an LLC, you’ll have to get approval from your board, shareholders, or managing members before you can go forward with closing down your business.
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Step 2: Create a dissolution proposal.
The first thing to note is that this step is only required for public corporations to figure out how to close a business. If you’re not public, you can move on to Step 3.
If you’re a public corporation looking into how to close a business, however, you’re among those required by most states to formally announce their intent to dissolve in a dissolution proposal. These proposals are part of public record and name the corporation, along with a statement that confirms a majority vote went into the decision to dissolve. (That’s why that first step is so important.)
When filing articles of dissolutions (more on that in a second!), make sure to also file Form 966, Corporate Dissolution, or Liquidation with the IRS. You have to make sure to get this form in within 30 days of filing articles of dissolution.
All in, what you need to know for this part of the closing a business checklist is that if you’re a public company, you’ll have to file articles of dissolution. Again, skip this step if you’re privately held.
Step 3: File articles of dissolution.
Now that you know you want to close down the business for good—and you've gotten everyone on board—it’s time to keep the state you do business in updated by filing articles of dissolution. This is a big step in the process of how to close a business.
What goes into filing articles of dissolution? The corporation or LLC dissolving its business will need to include their name, date the dissolution will go into effect, the reason for the dissolution and, if there is any, information on pending legal actions.
Once you file articles of dissolution with your secretary of state, your business will have its existence formally terminated.
When you’re no longer seen as active, this ensures that neither the business nor its owner will be liable to continue filing annual reports, paying state fees, or be charged fees associated with the business.
So, what you need to take away is that you should file articles of dissolution so the state in which you’re registered to do business no longer sees you as active. That way, you won’t be responsible for any new fees associated with your company.
Step 4: File a withdrawal
Did you previously register your corporation or LLC to do business in another state?
Even if you filed your articles of dissolution and no longer exist in your home state, you’ll still need to go through the process of how to close a business in any other states you do business in. That’s because the business is considered to be active in other states and can still be held liable for its obligations.
Filing a withdrawal allows you to stop doing business in other states and fully terminates the company.
The biggest takeaway for this part of the closing a business checklist? Make sure you file a withdrawal in any other states you’re registered to do business in.
Step 5: Distribute assets
Now that your corporation or LLC has completely dissolved in every state it does business in, it’s time to distribute any remaining assets. Good news—we’re now on the last step of how to close a business in its entirety.
First, if the business has creditors, like small business lenders, these must be paid back before anything else. Any assets that remain are generally distributed to the owners based on the percentage of the business that they own. LLCs distribute assets to managing members based off their original contributions. Corporations pay shareholders based on the number of shares they own and shareholders will return their outstanding shares.
For this part of the closing a business checklist, remember that you must pay back debts to creditors before distributing assets, and then you can distribute any existing assets based on the percentage of business ownership.
How to close a business: Saying goodbye
In terms of the steps you need to know to close your business as cleanly as possible, your closing a business checklist is complete. Although learning how to close a business and shuttering your company might be a painful process, you’ve learned so much as a small business owner that you can take into the next phase—whatever that might be. It can and should be hard to say goodbye, but you can never replace the experience you've had. You have so much to take forward with you in whatever your next endeavor might be. We wish you the best of luck in whatever that might be.
This article originally appeared on Fundera, a subsidiary of NerdWallet.
Deborah Sweeney contributed to this article.