Formal registration of a corporation is accomplished by entering it into the state and the IRS databases. After that, the firm acquires certain liabilities, such as regular reporting and payment of taxes. The state expects the owners to fulfill their obligations throughout the life of the corporation, so it is essential to close it properly. Otherwise, you may face fines and other adverse implications caused by failing to pay taxes or missing reporting deadlines. This will not only affect your image but may also incur significant costs. To avoid this kind of trouble, sticking to the statutory procedure for closing a corporation is vital. Let’s delve into this in a little more detail.
How Do I Close a Corporation?
Even though the history of some corporations goes back decades, at a certain point, some of these companies decide to stop operating. This can be driven either by the owners’ desire or external factors. As such, the state has the right to administratively liquidate a venture for violating legal regulations.
Quite often, the closure is caused by the fact that the owner does not have enough experience in managing the company. Without the required skills, even a talented car mechanic cannot properly organize the operation of their workshop. For the successful development of your enterprise, you need more than just the skill to repair cars.
Another common reason for a corporation to close its doors refers to mistakes made in planning the budget. If an enterprise’s expenses exceed its working capital, this can create certain hardships. Besides, entrepreneurs often expect the venture to start generating significant income before it actually does. Therefore, it is critical to correctly estimate the utility, material, labor, and other costs, as well as to budget wisely.
Finally, you should not forget about unforeseen circumstances, which may force even a fast-growing corporation to close. For example, it could be a tornado that destroyed a city or a new invention entering the market, which makes your product irrelevant.
For you to go forward with confidence after shutting down a corporation, you need to follow the procedure. The requirements may be slightly different in each state, but the key steps are generally the same.
Steps to Dissolve a Corporation
When you are no longer interested in operating your corporation, it has to be liquidated under the statutory procedure. As a rule, this process involves several successive steps.
1. Deciding On the Closure
To determine whether a corporation should be terminated, there should be a vote by calling a meeting of the board of directors. Regardless of its outcome, the meeting minutes are to be attached to other company papers.
Once the dissolution has been approved by the board of directors, you will need to take a vote among the shareholders, also by getting the required number of votes. The exact amount depends on the specifics of the state where the corporation is registered. In most cases, the threshold is set at a two-thirds vote.
After the decision is fully approved internally, you should conclude a written dissolution agreement with the signatures of all the shareholders.
2. Filing Paperwork With the State
Normally, the forms you will need to wind up your corporation are available on the state’s official website. They can be called “Certificate of Dissolution” or “Articles of Dissolution”. Most often, an application may be submitted either online or by mail. However, be ready for the fact that some states prefer only one of these types of documentation.
Furthermore, if a firm has a license to conduct business in other states, you should submit an application to them as well.
Once the paperwork is approved, your corporation is officially considered terminated. From that point on, it cannot carry out any commercial activity, so it exists only to pay its remaining debts and obligations.
3. Submitting Your Final Tax Return
For the IRS to stop imposing taxes on your company, you have to notify them that you have stopped operating. First, make sure you do not have any tax liabilities. After that, file your annual report with the regular tax return form. Mark the special box to indicate that the report is final.
Additionally, don’t forget to inform your state and local tax authorities. To ensure you don’t miss anything vital, consulting with an experienced accountant or tax expert is also a great idea.
4. Informing Creditors and Other Interested Parties
The moment of notifying creditors and how to do it varies from state to state, so these details are best checked with the state’s official website. Anyway, the owners should send a notice by post informing them of how, where, and when their claims can be filed. Some states also require you to publish a notice of corporation closure in the local newspaper.
Furthermore, you need to inform suppliers, customers, landlords, and others, who may be affected by this.
5. Asset allocation
The organization has to pay off all existing debts and obligations. The remaining assets should be distributed to the owners. Most often, shareholders receive funds in proportion to their ownership interests.
If a corporation has more than one type of stock, the order of its allocation is usually stipulated in the company documentation.
The IRS should be notified of the distribution.
6. Final Shutdown of the Entity
To conclude, all corporate bank accounts should be closed, as well as licenses and permits have to be canceled. If your corporation uses a DBA, also sometimes called an “assumed name” or “fictitious name”, it should also be abandoned.
Besides, you may need to cancel your Employer Identification Number (EIN), usually known as the Federal Employer Identification Number (FEIN). To do that, simply send a letter to the IRS with the information about your organization, an EIN, and the reason you’ve decided to close it.
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