Closing a business is no small matter. There are so many things that must be done. Where do you even begin? What considerations should be on your radar?
There are many standard items that should be on your checklist for closing your business, including:
- Following the dissolution procedures set forth in your partnership agreement, articles of incorporation, or state law
- Collecting money owed to the business
- Notifying your landlord and employees
- Notifying creditors
- Notifying insurance carriers
- Selling and distributing the business' assets
- Settling creditor claims
- Closing out accounts
- Dealing with any outstanding or potential contractual issues or third-party lawsuits
- Cancelling business licenses and permits
- Filing dissolution papers with the state
- Maintaining records for the legally required time period
One major item on the to-do list is dealing with the many tax issues that may arise when you wind up your business. The Internal Revenue Service (IRS) advises you take the following actions when you close your business:
- File an annual return for the year that you go out of business. If your business is a partnership or a corporation, there is a box at the top of the page to check which will indicate that this tax return is a final return.
- File employment tax returns
- Make final federal tax deposits
- Issue final wage and withholding information to employees, and payment information to subcontractors
- Report information from W-2s (employees) and 1099s (subcontractors) issued
- Report capital gains or losses
- Report partner's shares
- File final employee benefit plan
- Report corporate dissolution
- File return to report business asset sales
- File return to report the sale or exchange of property used in the business
The IRS maintains a convenient list of forms that you may need to file. Which forms will be applicable for your business will depend on the corporate structure of the business, and whether the business has employees.
If you do have employees, another item for your checklist will be your federal Employer Identification Number (EIN). While the IRS does not cancel your EIN, it can close your business account upon notification from you. Notification must include the complete legal name of the business, the business address, and the reason for closing the account. The EIN can be used again in the future, should you decide reopen the account.
There may also be state and local obligations to consider. For example, in California, entities wishing to dissolve must file a final current year tax return, pay all tax balances, and file the appropriate dissolution form with the Secretary of State within 12 months of filing the final tax return.
As a business owner, there may be circumstances where you could be held personally responsible for the business' tax debt, such as unpaid payroll taxes, so it is important to ensure that all tax matters are handled appropriately.
Additionally, when closing a law firm business, attorneys must be mindful of their fiduciary obligations. As the decision to close the law firm nears, attorneys must continue to communicate with clients, remain diligent, and deal appropriately with client trust accounts.
Closing a law firm business also involves ending the attorney-client relationship with any active clients. Under ABA Model Rule 1.16(d), an attorney has a fiduciary obligation to take "reasonably practicable" steps to protect a client's interests when ending the representation of a client. This obligation specifically requires:
- Giving reasonable notice to the client that the attorney is terminating the representation
- Allow the client time to retain other counsel
- Return files and property to the client
- Refund any advance payment of a fee or expense that has not been earned or incurred
Under this section, an attorney may retain papers relating to the client as allowed by law. Importantly, under ABA Model Rule 1.15, attorneys must keep complete records of client account funds and property for five years after ending representation.
Winding up any business can be a complicated process. It will likely be necessary to employ the assistance of an accountant to deal with tax issues and reconciling your accounts. If this is not your area of expertise, it may also be advisable to seek the counsel of an attorney who specializes in dealing with these matters. If you do retain an attorney, it may be useful to compile a list of pertinent information prior to your first meeting.