Question: We are thinking about close our business. What should we do? Do you have a checklist?
Answer: It's very smart to consult your CPA and lawyer when it's time to close your business. Leaving unfinished business can have a serious consequence with legal and/or tax liability. Here are a list of the tasks you might want to go through. I am trying to be as thorough as possible but there is no guarantee the list is inclusive.
Creditors and stakeholders
You should make payments to all your creditors. Notify all your creditors, suppliers, service providers, utility company, insurance, lease, banks etc. Terminate the ongoing contracts with the vendors. Doing it can limit the time that your creditors can file a claim against you. Your lawyer should advise you about the legal obligation to creditors.
You should notify all clients about closing. It is not legally required but it generate goodwill for any future business.
Make sure you talk to your insurance company either close the insurance or in some cases, have a tail policy(For example, have a professional E & O tail policy to cover potential professional liability after business closed). You will also need to cancel workman's compensation policy.
Local agencies
You will need to cancel business licenses, permits and fictitious name.
In California, although there is no state business license, every city you do business in needs to have a business license registered with the city. (Some cities call it California business tax certificate)When you close the business, you will need to go to city hall to cancel the license (or certificate)
In addition to the general business license, some type of business require additional local permits or licenses. Those needs to be closed out as well.
If you had registered a fictitious name, You will need to go to the county office to cancel the name. For example, in Santa Clara county, you will need to file "FBN Statement of Abandonment" to let them know you are no longer use the name for business. You can file the form online or in person. In San Francisco county, you will need to mail the Statement of Abandonment Form or go to the county office.
if you have been registered with BOE, you will need to file final sales tax return, notify them in writing and cancel your seller's permit. Here are the BOE information regarding Closing Out Your Seller’s Permit.
Legal Side
Depends on what kind of business structure you have, you will need to close the business according to your written agreements such as partnership agreement in the case of partnership, articles of incorporation in case of corporation etc. A good lawyer will be important especially when there are multiple owners.
Secretary of State
If you have business other than sole proprietorship, within 12 months of filing your final business tax return, you will need to legally cancel, dissolve or surrender the entity. For more information, California Secretary of State website provide you with detail information. Read here. Consult your business attorney for further advice.
Notify IRS
For dissolution of a corporation, you will also need to file IRS Form 966 Corporate Dissolution or Liquidation within 30 days after the resolution.
Employees and Payroll taxes
Run final payroll and pay employees including the vacation and sick pay.
By law, you need to notify them at least 60 calendar days before the closing. Check out US Department of labor employment law and consult your attorney.
In California, you are required to provide employees regarding unemployment benefit. Provide them with The EDD publication, For Your Benefit - California’s Programs for the Unemployed (DE 2320)
Make final federal payroll tax deposits and California payroll tax deposits. File final quarterly Form 941, Employer's Quarterly Federal Tax Return and final annual Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return.
At year end, you will submit the Form W-2, Wage and Tax Statement and Form W-3, Transmittal of Income and Tax Statements as always.
If you have been paying subcontractors, you will need to file Form 1099-MISC, Miscellaneous Income and Form 1096, Annual Summary and Transmittal of U.S. Information Returns
For California, you will need to submit to EDD within 10 days of closing Payroll Tax Deposit (DE 88/DE88ALL) with payment,Quarterly Contribution Return and Report of Wages (DE 9), and Quarterly Contribution Return and Report of Wages (Continuation) (DE 9C). Check Box B “Out of Business/No Employees” and fill in B1 “Out of Business Date” on the DE 9.
Federal and California final income tax returns.
On the final income tax returns of partnership, Corporation or S corporation, check the "final return" box. If there are schedule K-1s, you will also need to mark the "final" on schedule K-1s.
EIN Number
To close business account with IRS, send IRS a letter with your name, address, EIN number and reason to close the account. Send the letter to IRS, Cincinnati, Ohio 45999.
Record Keeping
It is wise to keep all legal, accounting, tax and employee records after closing of the business. Some guideline advise the records should be kept for 3-7 years. Personally, I would advise digitize all records and keep it indefinitely. Read more on record keeping tips.For tips to how to find the right accountant, read Several crucial questions to ask when looking for a accountant.
There might be some tax ramifications to both the company and the owners when you close the business. For example, distributions due to liquidation of a corporation might trigger capital gain or loss on shareholder. If the property distributed has been appreciated over the years, it is a taxable event for the corporation as well. It is important to engage a qualified CPA when you plan to close your business. As a top San Francisco CPA and accountant, Virtual CPA For You is quite qualified to serve you. Please give us a call 415-704-8989 or email ymckee@virtualcpaforyou.com. You can also book a meeting at line.