You have come to the end of business operations. This could occur from death, disability, systemic or operational failure or any host of other reasons. Do not beat yourself up. Develop a plan and follow it. This article should help.
First, however, if you have had financial difficulties, quit reading this article, find a good bankruptcy attorney, engage him or her and take your counselor’s advice. If you do not take your lawyer’s advice, you could find yourself personally liable for the debts or your business irrespective of your corporate or LLC shield; in particular, employment taxes. These must be paid or you as the owner/manager of the business will be liable. Do not trifle with these. If you are not making your withholding tax payments to the IRS, stop now and develop a bankruptcy plan with a qualified bankruptcy attorney. Now let us turn to normal dissolution scenarios.
If your corporation or limited liability company has never operated a business or is no longer operating a business, why should you dissolve the entity rather than just allowing the state to dissolve it for failure to file an annual report and franchise taxes. This would avoid the expense and perceived hassle of dissolving it yourself. The answer is easy. The state requires you to do so and the IRS expects you to do so; further, dissolution avoids having to answer a never-ending stream of letters and inquiries from taxing authorities, creditors, and employees. Further, there are some states, not many though, that provide for individual liability for entity debt if the dissolution process is not followed.
In any event, the dissolution of your business entity is not as complex as it initially seems since in most cases, you are operating a single equity owner or family-owned business.
One simple caveat. Once you act to dissolve and complete the process, you cannot operate the business as a business, other than for winding down.
Here’s our Seven step process:
1. Stakeholder approval. This should not be difficult given the small number of stakeholders in most businesses. Do this in writing. All directors, managers, officers, and stakeholders should sign the approval. If that is not possible, read the articles, bylaws, or operating agreement, as applicable, and follow the procedure set out in those documents. If these documents no longer exist, consult your state statute, or consult an attorney to advise you.
2. Certificate filing. File a certificate of dissolution with the state of organization and with all states in which the business is qualified to do business. Some states require this filing prior to notifying creditors and others require filing after notification. Some states also require tax clearance and the payment of those taxes before dissolution can occur. If the business does not have the money to pay these taxes, you can avoid this whole process and just walk away from the formal dissolution process and elect to deal with the demand letters and mail that follows, all of which will eventually stop despite the dire warnings other providers in our industry make.
3. Tax filings. Even though the business is no longer in existence, you need to file the forms due to close out your tax obligations to terminate those obligations. This will avoid a lot of problems if applicable federal, state, and local governments do not know you have ceased operations. Remember, payroll withholding taxes come first. Consult your accountant and prioritize the filing and payment of all taxes and other debts. Some taxes may result in person liability, as well debt you have personally guaranteed. You need to know which and pay those out of the business first on advice of your accountant and attorney.
The IRS and most states have web sites on the procedure. I cannot emphasize this enough. Do not forget your payroll obligations. This, again, will result in individual liability to you for the unpaid payroll tax amounts. Our advice is to make sure the payroll taxes are paid in full since your failure to pay could result in an assessment against the business stakeholders. I litigated this with the IRS for almost 20 years. It’s brutal and there is generally no way out.
Here is a short list in this respect:
- Annual tax returns. Your Form 940 reporting federal unemployment tax must be filed for the business’ dissolution year.
- Employment tax returns. You must file final employment tax returns and issue W-2s reporting final wage and withholding information to your employees. File a statement with your final return with contact information for follow up questions.
- Make final federal tax deposits. Have your accountant use the Electronic Federal Tax Paying System (EFTPS) in this respect to immediately pay the amounts due an provide an electronic and irrefutable record of payment.
- Report capital gains or losses. The form depends on the business entity.
- Report partner/stakeholder shares. Again, the form completed will depend on your business entity.
4. Wind down of business. Notify in writing all creditors, customers, landlords, insurers, and vendors. Also, cancel all licenses, permits and registrations, including fictitious name filings. The creditor part is very important since you give them a date to state the claim, absent which the claim could be barred under state law.
Notification allows the recipient to assert a claim and allows the business to contest or negotiate a settlement amount. In the notice, confirm the cessation of business, give a return mailing address, set out a deadline for filing, and list what you consider to be the basic points for a valid claim.
5. Pay valid claims. This allows you to review and contest claims. This can be a difficult and drawn-out process involving an attorney, but once an agreement is reached, the creditor is bound by it and cannot ever assert that or any other claim the creditor may have again -either against your business or you.
6. Distribute assets. Any money and assets remaining after the preceding steps can be paid out to stakeholders in proportional shares.
7. EIN. This falls under #3, above. You cannot cancel the EIN as it is personal to your business and remains outstanding forever. This prevents anyone else from using it. After closing, do not use the EIN ever again for any purpose.
The best course of action for a business that fails financially is bankruptcy. As to all others, the best course is voluntary dissolution - rather than state-imposed dissolution. This avoids any claims of personal liability against managers, directors, officers, and stakeholders. Formal dissolution avoids the incessant hassle of correspondences from government authorities and creditors and the potential of tax liability and legal troubles.
In this, if things get complex, hire a good accountant and attorney. They will be worth their weight in gold.
In case I was not direct enough above, my last word to you as someone who litigated with the IRS for over 20 years, pay all withheld payroll taxes prior to any other payment. Then pay all entity taxes due. Then worry about employees and creditors. This may sound harsh, but then, if this applies, so is the situation you are in and you need to act to survive.