How to Close a Business: A Step-by-Step Guide to Dissolving Your Company and Tying Up Loose Ends

You’ve made the difficult decision to close your business. Depending on the company, winding down a business can take several weeks or months. If you have a plan and a checklist for closing a business, it can make the process easier. Our Maryland business lawyer explains how to dissolve a business in Maryland in ten steps.

Steps to Close a Business in Maryland

Each business is unique. So discussing how to close a business with an experienced Maryland business lawyer is always a good idea. However, these steps are a good guide for winding down a business.

Step 1: Develop your exit strategy

It isn't easy to walk away from a company you created and built. It is different from quitting a job for another job. You need to know what you will do after dissolving your business. You must ensure you have the financial means you need to enjoy life. Careful planning ensures you have sufficient means to support yourself after paying taxes and other expenses for the sale of a business.

So consult financial professionals about your personal finances before closing your business. They can help you prepare a personal cash flow statement and prepare to pay down personal debt before selling your company. There are several ways to create income streams during retirement.

Step 2: Notify employees and key staff members

Telling your employees about closing your business could be one of the most difficult steps in the process. Create a timeline to notify employees. Consider your language and how employees may react to the news. Be prepared to answer questions about final compensation, benefits, references, and final work schedules.

Depending on the size of your business and employment contracts you might have with workers, there could be legal bases you need to cover. For example, some companies could be subject to the federal Worker Adjustment and Retraining Notification Act. Maryland businesses may be subject to similar provisions in the state’s Economic Stabilization Act.

Step 3: Sell or collect outstanding receivables

Send final invoices to customers and clients to collect outstanding accounts receivable. Track and monitor these payments closely. You might need to follow up with telephone calls to collect outstanding receivables.

If you have difficulty collecting receivables, consider selling outstanding receivables to a factoring company. A factoring company pays you a part of the amount owed on each account.

Step 4: Sell your business assets

Identify saleable business property and assets by creating an inventory spreadsheet. Include the current fair market value for each item, when you originally purchased the item, and the original purchase price. This information will help when you file final tax returns.

How you sell your business assets depends on the assets you must sell. For example, if your company owns land or a building, you will likely need a realtor to assist in selling the property.

Equipment, tools, furniture, and inventory can be sold to competitors. You could also advertise and hold a liquidation sale for the general public. Regardless of the method you use to sell your business, you must keep detailed records for accounting and tax purposes.

Step 5: Prepare and file articles of dissolution based on the business entity

If your company operates as a corporation or limited liability company (LLC), you must legally dissolve the business structure. Each state has a process for dissolving companies. For example, Maryland requires LLCs to file Articles of Cancellation. Corporations must file Articles of Dissolution. Forms are filed with the Maryland State Department of Assessments and Taxation. The timing to file articles of dissolution also varies by state, so you need to confirm whether to file the articles before or after winding down the business.

Step 6: File other relevant documents and paperwork

Depending on your business type, there could be other paperwork you must file. For example, you may need to cancel business licenses, permits, and registrations. You may also need to file paperwork to discontinue using your business name or doing-business-as (DBA) name. Remember to file required paperwork at a local and federal level too.

Step 7: Inform your clients and customers of the business closing and complete jobs in progress

Typically, a dissolved business cannot operate or conduct business other than business necessary to wind up the affairs and liquidate assets and outstanding accounts. You must decide whether you can complete outstanding jobs or refund payments. In some cases, you might need to negotiate an early termination of projects or pay fees for incomplete jobs.

As part of the planning process for closing a business, review all customer contracts again. The contract terms may affect how you need to wind down this part of your business.

Step 8: Notify company creditors and pay outstanding business debts

You must notify creditors that the company is closing. Depending on state law, you may need to use specific means to notify customers, such as by mail or public notice. The notice should include information such as:

• The date the Article of Dissolution was filed or your intent to dissolve the company

• The mailing address for creditor claims

• Information that should be included in creditor claims

• The deadline for submitting claims (must comply with state and federal laws)

• A statement that claims filed after this date will be barred

Review all creditor claims immediately upon receipt. If you reject a claim, you must notify the creditor promptly and in writing of your rejection of its claims. The creditor could have one or more legal options for pursuing the alleged debt.

You must pay or negotiate debts you accept. Some creditors might be willing to settle the claim for less than the total amount owed. If so, you should draft a written agreement for both parties to sign to settle the debt. Don't forget to close business credit cards.

Step 9: Submit final payroll forms and file taxes

After issuing final paychecks, you need to file final state and federal employment tax forms and business tax deposits. The Internal Revenue Service has a checklist of steps to take to close your business with it. Don’t forget to issue final tax forms to your employees that they will need when they file personal taxes, including W2s and 1099s.

You will also need to submit the company's final federal and state tax returns. Corporations and partnerships must also file reports for shareholder and partner allocations. The company structure determines the filing deadline for final tax returns. For example, partnership and LLC final tax returns are due by April 15 of the year after the business closes. Corporations must file final tax returns within two months and 15 days after closing the business.

Step 10: Distribute remaining cash or assets and close business bank account 

After paying all claims against the company, final taxes, and other expenses, the remaining assets or cash can be distributed to the company owners. Assets are allocated based on an owner’s or shareholder’s percentage of ownership. Distributions are reported to the Internal Revenue Service based on the company structure. Closs all business accounts after distributing the remaining assets. 

How to Close a Business - FAQs

Following the correct procedures when closing a business can avoid problems with employees, customers, creditors, and the government. Below are frequently asked questions about how to close a business that might be helpful.

Do you have to notify the IRS when you close a business?

You must file a final tax return for the year you close your company. The final tax return notifies the IRS that the business has closed. The filing requirements and deadlines depend on the type of company you own.

For example, a sole proprietorship files a Schedule C with their personal income taxes. You can write “final return” across the top of the Schedule C. Partnerships must file Form 1065 U.S. Return of Partnership Income for the year the business closes. Corporations must file Form 966 Corporate Dissolution or Liquidation. Since LLCs are organized under state law, they file tax returns based on how they are classified for federal income tax purposes.

There could be other forms that must be filed with the Internal Revenue Service when you close your business. A business tax lawyer can help you ensure you file all final tax returns to close the company.

Do I need to cancel my EIN if I close my business?

Your employer identification number (EIN) is a permanent number the Internal Revenue Service assigns to your company. It will always be associated with your business for record keeping.

When all final returns have been filed and you paid all taxes owed, you can request to cancel your EIN and close your business account. You must send a letter to the IRS to cancel the EIN that includes:

• The complete legal name of your business

• The business address

• The EIN for your business

• The reason you want to close the account (i.e., you dissolved the company)

If you have the EIN notice the IRS sent you when you requested an EIN, include a copy with your letter. Keep copies of all documents for your records.

Can you shut down your own business?

Business owners can shut down their businesses any time they choose. However, they must take the proper steps to close a business to avoid liability and legal problems. The steps for closing a business differ depending on the business structure, the type of business being operated, and other factors.

Closing a business requires more than locking the doors and putting up an “out of business” sign. Consulting a Maryland business lawyer and other professionals can make shutting down your business less stressful.

What do you say when closing a business?

It is difficult to know what to say when closing a business. Shutting down a company can be challenging and emotional for the owners, employees, and customers. Before notifying employees or customers, it helps to take time to contemplate the message you want to send.

For example, why did you ​go out of business? Giving employees and customers a reason for closing can help avoid rumors and hard feelings. Other things to include in your statement are:

• The effective date for the business closing

• The changes that will occur while winding down the company

• Information employees can tell customers, creditors, and other people

• The company’s plan to pay employees for unused benefits and issue final paychecks

• Steps the company intends to take to help employees

• What you intend to do with the facility and assets

Taking the time to consider talking points and writing an outline for your announcement can make giving the news of a business closing easier for everyone involved. ​Rehearse what you will say several times and ask those close to you for their input.

Get the Help You Need to Close Your Company

Closing a business and dissolving a company can be a daunting and confusing task. However, a Maryland business attorney can help you prepare your company for closing and navigate the process to ensure you take all steps to protect your interests. If you have questions about closing your business, contact Steve today for more information.