Closing your business requires careful planning to protect your finances, your team, and your reputation. This checklist breaks the process into 11 key steps.
Legal requirements vary by entity type
How you close your business depends on how it's structured.
If you're a sole proprietor, closing up shop is largely your call. There's no board to consult or governing documents to follow. While there are some necessary wrapping-up steps to complete, you don't have to consult a board or follow governing documents to make the decision.
LLCs and corporations are different. You'll need to get approval according to your operating agreement or bylaws, and follow your state's formal process for dissolving the business and winding down. The state filing process can also look different depending on whether you’re an LLC or corporation.
Requirements for dissolving an LLC or corporation also vary by state, including which steps are required and the order in which you must complete them. In some states, you need to notify creditors or obtain a tax clearance certificate before filing Articles of Dissolution. Other states let you file first and handle those steps afterward. Before you begin, it's worth checking the specific requirements for your state and entity type.
For more information, see our guide on dissolving an LLC or corporation.
Steps to closing your business
No two business closures look exactly alike. As we’ve just addressed, requirements differ by state and business structure, and certain situations add extra layers. A business going through bankruptcy, for example, must follow a court-supervised process that takes significantly longer than a standard closure. It might be necessary to get professional advice from a legal professional who can walk you through the requirements that apply to your specific situation.
That said, most business closures follow a similar general path. Here are the steps to expect.
1. Make the decision official
If you're an LLC or corporation, closing your business isn't as simple as ceasing business activities. You'll need to hold a formal vote to dissolve, as laid out in your operating agreement or bylaws.
- Confirm the decision with co-owners or partners, according to your operating agreement or bylaws
- Hold a formal vote to dissolve, if required by your entity type, and document it in meeting minutes
- Set a target closure date
- Draft a wind-down plan and timeline
2. Dissolve the entity
Sole proprietorships don't need to take this step, since they aren't created through a state filing. LLCs and corporations, on the other hand, should formally dissolve to halt their obligations to file an annual report and pay state franchise tax.
Filing Articles of Dissolution also puts creditors on notice that your business can no longer take on new debts. Once dissolved, your entity can't conduct normal business operations, but it can still complete wind-down tasks like settling debts and distributing assets. Keep in mind that most states won't process your dissolution if your annual report filings aren't up to date.
- Obtain tax clearance certificate (if required by your state)
- File Articles of Dissolution with your state of formation
- Withdraw from any states where you're registered as a foreign entity
3. Notify employees, customers, and creditors
As you prepare to close, it's important to inform those who are directly affected by the decision to close. Giving employees, customers, and business partners as much notice as possible helps preserve relationships and gives everyone time to plan. If you're formally dissolving an LLC or corporation, you'll also need to notify creditors in writing as part of the process.
- Employees
- Customers
- Creditors
- Vendors and suppliers
- Registered agent and other service professionals (ex. CPA, attorney)
4. Wrap up payroll and contractor obligations
If you had employees or contractors, you will need to file the paperwork that officially closes out your payroll and issue the required forms.
- Pay employees final wages and all compensation owed
- Make final federal and state payroll tax deposits
- Issue final W-2s to employees
- Issue 1099s to contract workers
- File final payroll tax forms, marked "final return," including a statement with the name of the person keeping your payroll records and the address where they'll be stored
- Close your withholding account with your state's Department of Revenue and your unemployment account with the Department of Labor
5. Settle accounts and collect outstanding balances
Collect from your outstanding accounts receivable and pay or settle your debts. For each debt you settle, ask the creditor for written confirmation that the account has been paid in full or settled to their satisfaction, since you may need it later for your records or to satisfy dissolution requirements.
- Collect outstanding accounts receivable
- Sell off inventory
- Sell or liquidate business assets, including intellectual property
- Pay off secured debts tied to assets
- Settle remaining debts, like unsecured business loans, leases, credit cards, and accounts payable
6. Close out contracts, leases, and business accounts
As part of winding down, you'll also need to formally end the agreements and accounts tied to your day-to-day operations.
- Cancel or terminate business contracts
- Terminate your commercial lease
- Cancel business insurance policies
- Close vendor and supplier accounts
- Cancel business subscriptions and software accounts
- Notify payment processors
- Close utility accounts
7. Submit final tax returns
Closing your business comes with its own set of returns and forms to file with the IRS and your state.
- File final federal income tax return, marked as final return
- File final state and local tax returns (if applicable in your area)
- Submit final sales tax returns
- Deactivate your EIN with the IRS
8. Cancel state and local licenses and registrations
Cancel any licenses, permits, and registrations tied to your business, so you're not responsible for renewal fees or compliance requirements.
- Professional licenses
- Sales tax permits
- DBA registrations
- Local business licenses and permits
9. Distribute remaining assets to owners
Most states require a business to pay off its debts before distributing any remaining assets to owners. Once your debts are settled, you can divide what's left. How you divide it typically depends on each owner's percentage of ownership, as outlined in your operating agreement or bylaws. Depending on your entity type, you may also need to issue a final Schedule K-1 to each owner reflecting their share of the distribution.
- Confirm each owner's share according to your operating agreement, bylaws, or state default rules
- Distribute remaining cash and assets accordingly
- Document the distribution for your records
10. Close your bank account
Contact your bank to find out its specific requirements and steps for closing a business account.
- Cancel business bank accounts and lines of credit
- Shred business checks
- Cancel business credit cards
11. Retain records
Certain documents must be retained for a set period of time after closure.
- Keep business records for the required retention period (typically 3 to 7 years depending on record type)
- Properly dispose of records containing sensitive information when retention periods expire
Importance of dissolving your business
Formally dissolving your LLC or corporation is what brings its legal existence and ongoing compliance obligations to an end. Until you do, the entity still owes annual reports, franchise taxes, and other state requirements, with late fees and penalties piling up the longer it goes unresolved.
An entity that's still legally active can also still be sued, even years after it stopped doing business, and owners may be caught off guard by old claims they assumed were behind them. Failing to dissolve an LLC or corporation can leave it vulnerable to identity theft, too. Bad actors sometimes target dormant entities still listed as active with the state, using them to open credit lines or commit fraud under the company's name.
Closing a business the right way involves more moving parts than most owners expect, and the exact requirements vary by entity type and state. A professional service provider can take some of the administrative burden off your plate by handling paperwork like dissolution filings and final annual reports on your behalf.