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How To Close A Business With IRS: A Complete Guide

There comes a time when business owners know that every shred of evidence suggests that it's time to wrap it up. You need to know how to close a business with IRS since it is a complex process and involves detailed planning and mindful actions.

Make sure you wind it up in a way that would keep you from getting into any unnecessary trouble. In this article, you will learn how to close a small business,  how to close an LLC company, and FAQs about business closure.  

How To Close A Small Business

Below is a step-by-step guideline on how to close a business with IRS.

Devise An Exit Plan

You need all the shareholders on board while devising an exit strategy. Unless you plan it carefully you will likely end up having unpaid dues to the tax authority, unreceived payments from customers, or pending accounts payable to your vendors. 

You might need to consult professionals like lawyers, tax specialists, and accountants to ensure the closure happens with minimum disruptions. 

Collect Oustanding Receivables From Customers

Before you announce your closure implement practical steps to collect your outstanding dues from customers. You can offer them a discount as an incentive to pay soon. If you start the closing process and the words get out these receivables may end up as bad debts

Alternatively, consider selling outstanding receivables to factoring agencies. They usually buy them at a discounted rate which may give you some cash in hand. Note you will only receive a percentage of the invoice, not the total amount. 

Inform Your Employees And Pay What You Owe Them

Your plan should include when and how will you communicate your decision of closing down to your employees. They might feel confused and lost if you start implementing your closing strategy without their knowledge. 

Be clear about when will they receive their last paycheck, and when they have to hand over the company’s property. Don’t forget to reimburse any out-of-pocket expenses to them.

It is important to note that if you are closing down because of financial difficulty you need to figure out ways to increase cash flow to clear your liability toward your employees. Talk to your accountant and get an insight into your actual financial situation. 

You can consider “invoice financing” where you can use your invoices as collateral for cash. Alternatively, you can talk to the investor to bridge the gap. 

Dispose Of Your Business Asset

At some point during the closure process, you would consider selling your assets. You can put up your inventory at hand for sale on social media or online sites. If you have trouble selling the inventory you can reach out to the inventory liquidator and sell any excess items for a percentage of what the items are worth.

Make sure to report capital gains and to pay any capital gain taxes.

Complete Work In Progress and Notify Your Customers

Small businesses can either notify their costumes by issuing a statement in a local e-paper or by sending them an email. You can also use social media platforms to announce the closure.

Finish any tasks that are work in progress. Refund advances to the customer if you are unable to complete the job.

Notify Your Creditors And Clear Their Accounts Payable

Your creditors need to know that you are closing the business. There are laws on how to communicate closure decisions to your suppliers. Tell them when and how you will clear their dues. Transparency is key in having this difficult conversation. 

Be aware when you inform your bank that you are closing down they might start deducting money from your business bank account to pay off your loan. 

If you are operating as a sole proprietor or partnership you might consider sending letters to your creditors. They may file a claim against any unpaid dues. 

Complete The Legal Formalities And Paperwork

You need to close down your business accounts related to your permits, registration, and business names. This is important and failure to do so might result in lawsuits. This can happen when you forget to close your business name and someone else starts using it. 

Submit Tax Forms And Pay Your Dues 

Filing taxes for a closed business is an important step. 

Once you issue final paychecks to your employee file a payroll tax form and deposit employment taxes. If you are having cash flow issues you have the option to submit an offer in compromise with the IRS. This will reduce your tax liability. Note that you are not qualified to take this option if you have filed for bankruptcy. 

If you want to opt for an installment plan you have to submit the collection information statement. You will have to pay all the taxes you have collected up to the date of closure. 

The forms you will need to submit will depend on the structure of your business. 

If you are a sole proprietor you will file Schedule C by April 15, the year after you close, and indicate it is your final business tax return. 

Remember when submitting your final business tax return for the partnership which is Form 1065 check the “Final Return’ Box. Report your distributed profit and losses to the partners on Schedule K-1

Make sure to submit your employer’s quarterly federal tax return using Form 941. Once this is done issue form W-2 to your employees. Provide final withholding information to the IRS using Form W-3

If you own a food or beverage establishment then you need to report your tip income and allocated tip information on Form 8027.

You might need to provide final information on the financial status of the company’s pension or benefit plan on Form 5500

You also need to issue Form 1099-MISC to any independent contractor you hired. Then report their official payment information to the IRS using Form 1096.

Distribute Whatever Is Left To The Shareholders

This is the final step. After all your debts, taxes, and dues are paid off in full you can distribute among the shareholder whatever is left based on their shares of income.

How To Close A LLC Company

If you own a limited liability Company you must be familiar with the LLC tax guide for business owners. But when closing it your question would be how to close my LLC business. Let us look at that now.

Closing an LLC would require you to follow steps in addition to the ones mentioned above.  

Failure to close an LLC without taking the necessary steps will make you personally liable for the consequences. Consider a scenario where you have transferred the property to your LLC and after a couple of years, you decided to close it down. You won’t get your property back unless the LLC is dissolved. 

Additionally, LLCs are required to pay an annual fee in some states. If your LLC remains alive on paper after you have wrapped it up it will make you liable to pay the fees. 

The formalities to cancel an LLC includes a formal decision to close down the company as laid out in the article of association which usually requires a vote from the shareholder. Once the decision to shut down is approved you can find out the specific legal and regulatory requirements of the state you are situated in and follow the guidelines. 

You have to submit a form to dissolve an LLC. You need to file IRS dissolution Form 966 with the IRS within a month of the date of dissolution. 

Don’t forget to indicate that this is your final return when you file this Form 1120 and report your income, gains, losses, and deductions. You can consult a tax specialist and find out how to maximize allowable tax deductions and minimize tax liabilities for your LLC. 

Frequently Asked Questions 

Is There A Brief Checklist For Closing A Business?

Here is closing a business checklist that will help you ensure you took all the necessary steps to close down the business. 

  • Take shareholders on board when making the decision
  • Find out the laws and regulations you need to comply with
  • Talk to a specialist
  • Have an exit strategy
  • Plan how you will implement the exit strategy
  • Collect receivables
  • Notify all the stakeholders including employees, creditors & customers
  • Clear your due to your suppliers, creditors, employees & Independent contractors
  • File a final return & related forms
  • Pay taxes
  • Cancel your EIN and close your IRS business account.
  • Keep financial records

How To Let IRS Know Business Is Closed

IRS will know when you indicate it while filing your final return. The relevant forms you need to file will depend on the type of business you have. 

How To Cancel EIN With IRS

Note that the employer identification number (EIN) cannot be canceled instead IRS can close your business account. For this, you need to send them a letter that includes the following

  • The complete legal name of the entity
  • The EIN assigned
  • The Business address
  • EIN assignment notice if you have one. 
  • Reason for closing your account.  

So you now know how to close a business with IRS but it is important to consult a specialist and take their advice so you don’t miss or unknowingly skip anything that would land you in trouble with the tax authority. 

Ines Zemelman, EA
Founder of TFX