written by: Alia Nikolakopulos•edited by: Jean Scheid•updated: 3/23/2011
Closing a business without bankruptcy is often the best route for a struggling business owner to bow-out gracefully without accumulating legal fees and tarnished vendor relationships. This article discusses key basic components to consider if you're considering a dissolution.
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Many business owners that experience trouble paying business bills, or can’t seem to earn enough revenue to stay afloat are not aware of the option of closing a business without bankruptcy. If you’re a business owner drowning in company debt, the viability of your business may be threatened. Sometimes, dissolving a business that is becoming too financially cumbersome to operate is the best solution to avoid further debt and anxiety.
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If you decide closing a business and avoiding bankruptcy is the best option for you, the first step you must take is to dissolve your business in the state where it was first incorporated. This step applies to businesses that have a corporation or limited liability company structure, and in some cases, for general and limited partnerships. If you have a partnership that is registered with the state, you must dissolve the entity with the state when operations cease. You can obtain dissolution information from the Secretary of State where you transact business or your Public Regulatory Commission. Generally, you must complete an electronic or paper dissolution document and pay a filing fee. If you are a sole-proprietor, you do not have to dissolve your company with the state.
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Final Tax Returns
When you close your business, you must file final returns with the IRS; the IRS offers a great checklist on closing a business. Corporations, partnerships, incorporated LLCs and multi-member LLCs must file final income tax returns with the IRS, usually within six months after the business closure. Sole proprietors and unincorporated single member LLCs do not need to file final income tax returns. If your business structure requires you to file a final income return, check the “Final Return" box at the top of your tax return. If your business has employees, you must file final employment forms such as quarterly 941 reports and 940 FUTA reports with the IRS and state reports to your local Department of Labor or Taxation and Revenue Department, regardless of your business structure. Failure to file returns may result in the IRS or state expecting additional tax returns and subsequently creating penalties and interest against the business. The article A Guide to Close a Small Business offers even more information to help you dissolve your business.
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During the formal process of closing a business without bankruptcy, you may overlook notifying the creditors you owe money to. Prepare a letter to the entities your business owes balances to and offer notification of your dissolution. The letter does not have to be lengthy; in fact it is best to keep it simple. Reference your account number and provide your date of closure. In addition, provide information for the creditor to contact the business for questions prior to closing. Ideally, this letter should be sent at least 30-60 days prior to closing. Make sure you provide your creditors contact information for owners of the business for debt settlement purposes.
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Effect on Debt
Depending on your business structure, closing your business without bankruptcy will either cease future debt collection, or cause your personal assets and income to become open to collection to satisfy the debt. In general, the owners of corporations and incorporated LLCs are absolved from company debt when the business is dissolved and assets are liquidated.
An exception applies if a corporate officer personally guaranteed a debt, such as an SBA loan or line of credit or equipment leasehold. In these cases, the owner will remain personally responsible for paying back that portion of debt, even when the business is no longer open. However, owners of partnerships, sole proprietorships and unincorporated LLCs may be personally responsible for 100 percent of the business debt regardless of whether the company is still operating. Since these structures are at risk for personal credit and asset attachment situations, closing a business with debt should be carefully considered and planned for to avoid losing your personal assets. Alternatives for those personally at risk may include keeping the business open, obtaining a home equity loan, securing alternate financing or making special payment arrangements with creditors.
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IRS: Closing a Business Checklist - http://www.irs.gov/businesses/small/article/0,,id=98703,00.html
IRS: State Links - http://www.irs.gov/businesses/small/article/0,,id=99021,00.html
IRS: Business Structures - http://www.irs.gov/businesses/small/article/0,,id=98359,00.html