Under ordinary circumstances, you would spend several months closing down a business. Unfortunately, the COVID-19 pandemic has made sure these are not ordinary times. As a result, circumstances may have dictated you close your business much faster than normal. While many business owners have done so and let the chips fall where they may, doing so could lead to a number of unexpected financial and legal problems that could last many years, making an already bad situation that much worse. If you are needing to close down your business, work closely with your CPA to make sure you complete the following steps.
Collect Your Outstanding Accounts Receivable
Preferably, you should do this before notifying customers you are going out of business. Though you probably won't be able to collect everything owed to you, try to get as much as possible.
Sell Off Your Inventory
Whether it's a going out of business sale or taking a tax write-off by donating it to charity, sell off your inventory. Since there are many new rules regarding how to take a personal deduction thanks to the CARES Act, seek out the advice of your CPA during this process.
Notify Your Creditors
Once you decide to close your business, don't procrastinate about notifying your creditors. From your suppliers and service providers to your lenders and utility companies, giving creditors quick notification will be important, since this can help limit the amount of time each creditor will have to seek payment on your debt.
Notify Your Customers
After you have notified your creditors, do the same with your customers. Since you don't know what the future holds, you always want to leave on good terms with your customers. To do so, notify them as soon as possible, and also try to live up to any previous contractual obligations. This should include returning any payments you have received for goods or services that were not delivered or rendered.
Terminate Your Lease
In most commercial leases, tenants are required to give landlords at least a 30-day notice, so you should always do this if possible. Depending on your individual situation, your landlord may give you a break and defer your final lease payment.
Notify and Pay Employees
While this may be the toughest thing you do from an emotional standpoint, you owe it to your employees to give them notice and pay them as soon as you can. Most likely, you will need at least one employee to work with you until the last day. If so, give them a bonus to reward them for their hard work and loyalty. Give all employees their final paychecks on their last day, and make sure the paychecks include the value of accrued vacation time. If you obtained a PPP Loan during the pandemic, special rules may apply, so talk this over with your CPA.
Liquidate Your Business Assets
Once you are closed, liquidate your company's assets quickly and in a manner that lets you recoup as much money as is reasonably possible. Once you do, you can begin settling debts with your creditors. Once you pay off a bill in full, always get a letter from your creditor verifying this, just in case questions arise later on.
Make Your Last State and Federal Payroll Deposits
Due to the pandemic, you can defer 50% of your employer portion of Social Security payroll taxes until 2022. To ensure you don't make any mistakes in doing so, put this in the hands of a trusted CPA.
Submit Sales Tax Forms
Along with your payroll deposits, submit your last sales tax forms and any funds due up to your closeout date. While doing so, remember to also cancel any credit cards and subscriptions associated with your business, and also close your company's bank account and other accounts as well.
Bulk Sales Laws
In some states, business owners must comply with bulk sales laws. Should you sell your inventory, these laws may require that you notify creditors within a specific timeframe, and that you publish a notice about the closing of your business in the newspaper.
Cancel Permits and Licenses
From your business license and seller's permit to your assumed business name, make sure you cancel any and all local and state permits and licenses.
File Your Tax Returns
This is where you will need to rely on the expertise of your CPA. Along with filing your final employment-related tax returns, which will be IRS Forms 940, 941, and your state tax withholding and wage reporting forms, file your final income tax return and check the box indicating it is your last return. If you sold any business assets, IRS Form 4797 or 8594 may also need to be filed.
Distribute Remaining Assets
If any assets remain, distribute these as required to you and other owners of the business.
Leave Contact Information
Prior to closing for good, always leave contact information with your employees, business contacts, and colleagues, just in case they need to get in touch with you later on.
Dissolve Your Business
As your last step, dissolve your business. Whether it was an LLC, corporation, or partnership, file the required forms that include a "certificate of dissolution."
Filing for Bankruptcy
In most cases, small business owners like yourself can close down their business without having to file for bankruptcy. However, if your debt load is very large or your creditors are determined to get every penny owed to them, bankruptcy may need to be seriously considered. If so, it is important to remember that filing for bankruptcy will be the first step in your closing down process, with the other steps mentioned here following later on.
Since closing down your business will be such a stressful time in your life, it may be hard for you to concentrate on each and every small detail. Rather than make a mistake along the way that could only exacerbate your financial and legal difficulties, consult with your CPA from start to finish when closing your business.