Starting a business is an exciting undertaking. Running it is an adventure unlike any other. But like everything else in life, all good things must come to an end.

Businesses close for a wide variety of reasons. It could be because of financial hardship, changes in the marketplace, natural disaster, changes to regulations that make continuing untenable, or it could be that you’re just ready to retire. Whatever the reason, it’s important you follow the proper procedures so you don’t get hit with a bill from the IRS or any other nasty surprises down the line.

The Common Steps

The steps you’ll take to close your business vary, depending on how your business is structured (sole proprietor, partnership, LLC, or corporation), but every entity shares the following steps:

1. File a final IRS tax return and related forms: You must file a final return for the year you close your business.
The type of return you file – and related forms you need – will depend on the type of business you have. For example, a limited liability company (LLC) is a business organized under state law. An LLC may be classified for federal income tax purposes as a partnership, a corporation, or a disregarded entity.

2. Take care of your employees and employment taxes
If you have one or more employees (including yourself if you are an employee of your own business, you must pay them any final wages and compensation owed. You must also make final federal tax deposits and report employment taxes. If you don’t withhold or deposit employee income, Social Security and Medicare taxes, penalties may apply.

You must also provide a Form W-2, Wage and Tax Statement, to each of your employees for the calendar year in which you pay them their final wages.

Additionally, you’ll need to close any benefit plans you have for your employees.

3. Pay your state taxes, file your state-tax reports, and notify your state agencies that you are closing your business.
You may several reports and notifications to make. For example, in Texas, you may have to file and notify the Texas Comptroller for your Texas franchise taxes and your sales tax reports. You may also need to file a Certificate of Termination with the Texas Secretary of State.

4. Report payments to contract workers
If you have paid any contractors at least $600 for services (including parts and materials) during the calendar year in which you close your business, you must report those payments. There are other rules related to certain industries where the amount may be lower that $600 so please conduct a tax professional for your situation.

5. Close your IRS business accounts and abandon your EIN
The employer identification number (EIN) assigned to your business is the permanent federal taxpayer identification number for that business. You’ll need to send a letter to the IRS notifying them of your closure and that you intend to abandon the EIN after you file the final tax return.

6. Keep your records
How long you need to keep your business records depends on the kind of business record. For more information, check out our Business Records Document Retention Guidelines here: https://startupgreatergood.org/document-retention-guidelines-what-every-business-needs-to-know/

7. Check with your state for any additional requirements for closing your business:
In addition to the federal requirement for closing your business, you’ll need to consult with the state to see what you need to close at the state level. This would include things like sales tax permits and unemployment insurance accounts. Additionally, LLCs are created at the state level so you’ll need to contact your Secretary of State’s office to close it.

More Information

Closing a business can be a complex process. Luckily the IRS has detailed instructions you can follow. You can find detailed instructions with additional resource links here: https://www.irs.gov/businesses/small-businesses-self-employed/closing-a-business

They also have pdfs with details for each type of business structure:
Sole Proprietors: https://www.irs.gov/pub/irs-pdf/p5447.pdf
Partnerships: https://www.irs.gov/pub/irs-pdf/p5447a.pdf
Corporations (including S-Corps): https://www.irs.gov/pub/irs-pdf/p5447b.pdf