Making the decision to close down a business is never an easy one. After all of the time, effort, and money that has been invested into getting an LLC operational, reluctance to shut the doors for good is understandable even when doing so is the best and most obvious solution. The decision to dissolve a company could be based on a number of contributing factors or solely on one large problem that the company has run into. Situations vary but some of the most common reasons for business dissolution include:
- Financial insecurity;
Any company that closes due to bad management of its finances won’t be the first or the last: poor financial handling due to a lack of solid investment planning at the beginning of an LLCs life is one of the main reasons for the demise of a small business. Location, too, can play a huge factor in a business’s success or failure. Your company could be the best at what it does but if there’s little need for the services it provides in the area it was established, the business could be dead in the water from the word go.
Alternatively, the business may well have had a good run but now its owners want to hang up the shirts and ties and retire on the back of its success.
Since 2020, a major contributing factor to the closure of so many independent businesses has of course been the COVID pandemic, which has caused thousands of small companies to be swept off of the streets as the economy has bent in the wind to repeated lockdowns and limited operations.
How to Close a Single Member LLC with the IRS
Whether it be for the reasons mentioned above or for any other reason, once the decision has been made to dissolve an LLC, there are steps that need to be followed in order to close down a business correctly. First of all, you should look at the Articles of Organization and Operating Agreement, which were submitted at the formation of the company. Often, at least one of these will include information for a process and the rules to follow in the event of the business ever being dissolved. If not, not to worry: the majority of states permit the dissolution of a business if you, acting as a sole-owner, record in writing your intention to close.
As with formation, the rules for dissolving a business also vary slightly from state to state, however, the most common way to initiate the dissolving of an LLC is to file Articles of Dissolution with the Secretary of State. The information required when filing is the basic essentials, such as the name of the LLC and the date from which closure is to be effective (if different from the filing date of dissolution articles).
After this, further steps need to be taken including:
- Filing final employment tax returns;
- The paying of final wages to all employees;
- Paying all taxes owed;
- Sale of business assets.
When dissolving a single-member LLC that has staff on its payroll, the LLC must file either the Employers Quarterly Federal Tax Return or the Employers Annual Federal Unemployment Tax Return. Final withholding information and wages must also be issued to all of the LLCs employees, with a W-2 Wages and Tax statement.
Be mindful of the fact that though closing ‘now’, you may well have tax payments that will become due the following year.
Once dissolution has been decided and a date for end-of-business settled on, the LLC will go into the final stage of its lifespan known as the ‘winding-up’ stage. The winding-up stage means that now, the business exists only to take care of all of its loose ends before the doors are closed and lights turned off for good. This phase incorporates the paying off of debts and the settlement of any other obligations. The paying off of creditors may require the sale of business assets. Once debts are settled and financial obligations are tidied up, profit distribution (should there be any) would then also need to be dealt with and finalized.
When creditors are involved, it’s best to notify them of the intent to close the business. Doing this helps limit your personal liability as an extra precaution in the event of claiming any assets left over for yourself, should there be any disputes.
Note: most states will require you to give notice of the closing of your business via a community outlet such as a local paper, for reasons of potential future claims made against your business.
Reasons for the IRS Closing a Business
Of course, a business can also be closed involuntarily. After the time and money spent getting your LLC operational in the beginning, the only thing worse than having to dissolve the business yourself is having your business dissolved by someone else – namely the Internal Revenue Service. There can be several reasons for the IRS to step in and do this, the most usual factor being an LLC becoming delinquent with paying its taxes. Tax debts and other tax problems don’t necessarily mean the IRS will slam the door closed on you – even if they threaten to. So long as you remain in communication with the IRS, they will often work with you – so long as you seem to be making the effort to make amends and handle the problem. Being proactive can go a long way to helping you help yourself.
The most common reasons for getting unwanted attention from the IRS are as follows:
- Not paying business taxes on time;
- Failing to file filing returns;
- Habitual tax debt year after year;
- Payroll tax debt.