Alex was running his franchise business smoothly when he got a surprise letter from a collection agency. He was puzzled, wondering what he could possibly owe. It turned out to be a "Business Registration Fee" for an old business he’d started ten years ago but never really got off the ground. This was a wake-up call for Alex, and it’s a lesson for all of us: if you start a business, you have to officially close it if you stop operating it.
Alex had lost interest in his original company. He stopped advertising, didn’t look for clients, and had no income from it. But just because you’re not actively running a business doesn’t mean it’s officially closed. You have to formally close your LLC or Corporation. If you don’t, you could still be responsible for filing annual reports for your inactive business, filing state and federal tax returns, and maintaining any business licenses. All of these tasks take time and money, and no entrepreneur wants to pay more than they have to.
As Alex found out, the fees and obligations will eventually catch up with you. If you have a business that’s not active and you’re sure you’re done with it, it’s smart to wrap things up and officially close it before the end of the year. That way, you won’t be responsible for anything in the future, and you can focus on bigger and better things.
So, how do you close an inactive business? Here are the steps:
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Dissolve the Legal Entity (LLC or Corporation) with the State: An LLC or Corporation needs to be officially dissolved. If there are multiple owners or shareholders, everyone needs to vote on closing the business. After the vote, you’ll need to file an "Articles of Dissolution" or "Certificate of Termination" with the Secretary of State’s office where your LLC or Corporation was established. For a corporation, if shares were issued, two-thirds of the voting shares need to agree on dissolving the company. If no shares were issued, the Board of Directors needs to approve. You’ll need to record the final vote in the meeting minutes. For an LLC, each state has specific rules for closing a business. You’ll need to review the "dissolution requirements" in your state’s Limited Liability Company Act. You could also try calling the secretary or state’s office for help, or work with an online legal document filing service.
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Pay Any Outstanding Bills: You need to settle any company debts before closing the business. In most cases, an LLC or Corporation needs to settle its debts before any money or assets can be legally distributed to the members. If your business doesn’t have the resources to pay its debts, talk with an attorney to determine the next steps.
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Cancel Any Business Licenses or Permits: If you opened any licenses or permits (such as a reseller’s license), you’ll need to cancel them with the appropriate local entity. Be proactive about cancelling these things. The county government won’t know you’re not actually operating a business anymore (and will continue to assess fees) until you notify them.
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File Your Final Federal and State Tax Returns: You will need to file a tax return for the year you go out of business. For a partnership, corporation, S Corp, or LLC, you can check the box indicating that this is a final return. And if you have any employees, you’ll need to file the final employment tax returns and make your final federal tax deposits for these taxes.
Remember, these are just the legal steps needed to properly close a business. There are other things to consider as well. If you still have any active clients, you’ll need to create a closing plan with them. Likewise, you should discuss your plans with any key contractors, vendors, freelancers, suppliers or anyone else who has helped you. Don’t just disappear and leave them wondering what happened. By being considerate and open with your network, people will be more eager to join you for future ventures.
