Alex’s franchise business was running at full steam when he received a letter from a collection agency from out of the blue. Unsure about where he could possibly be delinquent, he learned it was for a “Business Registration Fee” and further investigating uncovered that it was fees for an old business he once started a decade ago and never did anything with.
The moral of the story is that any business, once officially launched, must be officially closed. In Alex’s case, he quickly lost interest in that original company, stopped advertising, didn’t look for clients, and had no revenue.
But just because you’re not actively working on a business doesn’t mean it’s closed.
You’ll need to formally close your LLC or Corporation. Otherwise, you can still be on the hook for filing your inactive business’ annual reports, filing state/federal tax returns, and keeping up any business licenses. All of these will take time and money – and savvy entrepreneurs don’t like to pay any more than they absolutely have to. As Alex learned, the fees and obligations will catch up to you eventually.
If you have an inactive business and are certain you’re retiring it, it’s smart to wrap things up and close it officially before the end of the year. That way, you won’t be on the hook for anything in the future and you’ll be free to focus your attention on something bigger and better.
How to Close an Inactive Business
1. Dissolve the Legal Entity (LLC or Corporation) with the State
An LLC or Corporation needs to be officially dissolved. If there are multiple owners/shareholders involved, all business associates need to vote on the business closing. After the vote, you’ll need to file an “Articles of Dissolution” or “Certificate of Termination” with the Secretary of State’s office wherever your LLC or Corporation was established.
- For a corporation: If shares were issued, two-thirds of the voting shares need to agree on dissolving the company. If no shares were issued, the Board of Directors needs to approve. You’ll need to record the final vote in the meeting minutes.
- For an LLC: Each state has specific rules for closing a business and you’ll need to review the “dissolution requirements” in your state’s Limited Liability Company Act. You could also try calling the secretary or state’s office for help, or work with an online legal document filing service.
2. Pay Any Outstanding Bills
You need to satisfy any company debts before closing the business. In most cases, an LLC or Corp needs to settle its debts before any money or assets can be legally distributed to the members.
If your business doesn’t have the resources to pay its debts, talk with an attorney to determine the next steps.
3. Cancel Any Business Licenses or Permits
If you opened any licenses or permits (such as a reseller’s license), you’ll need to cancel them with the appropriate local entity. Be proactive about cancelling these things. The county government won’t know you’re not actually operating a business anymore (and will continue to assess fees) until you notify them.
4. File Your Final Federal and State Tax Returns
You will need to file a tax return for the year you go out of business. For a partnership, corporation, S Corp, or LLC, you can check the box indicating that this is a final return. You can learn more here. And if you have any employees, you’ll need to file the final employment tax returns and make your final federal tax deposits for these taxes.
This list represents the legal steps needed to properly close a business. But there are other things to consider when closing a business as well.
If you still have any active clients, you’ll need to create a closing plan with them. Likewise, you should discuss your plans with any key contractors, vendors, freelancers, suppliers or anyone else who has helped you. Don’t just go dark and make them wonder what happened.
By being considerate and open with your network, people will be more eager to join you for future ventures.
Closed Photo via Shutterstock
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I did not know that when you stop a business, you have to like formally close it with papers and all. Good thing I was able to read this article. I am now aware of this process (just in case I get to do my dream of having a business one day). Just one question though, is this how it works in all countries? Or is this process applicable to the US only?
I’m with you. This was news to me as well. A great example of educating the masses with practical knowledge.
Hi Eds –
Thank you very much for reading my post and commenting. So glad to hear it was helpful to you!
To answer your question, we would assume it applies in all countries but each country varies with its rules and regulations. It does apply for sure to any state in the US.
I hope that helps!
-Nellie
Good post. By the time a business should be dissolved most SMB owners are so tired they probably just forget to tie up the loose ends.
Yes, so true! Thank you for reading & commenting, Robert.
-Nellie
Nellie,
Great tips.
I have closed a business in the past and lucky me, I manage to close it properly. At that time I never thought that it would cost me dearly in the future, but reading your post, I’m thankful I did managed to settle all the paperworks.
The above points are good. We also need to inform our existing clients that we are going to shutdown the service. And payback the amount if they have given an upfront to us.
I have a single member LLC in Pennsylvania. I had to discontinue offering services last year, as I needed to take care of a family member, thus rendering my LLC inactive. I hope to have my LLC active in the future(1-3 years), but am unsure if I need to dissolve it, or if I can simply keep it inactive until I can return.
Hi Lauren,
Thank you so much for reading and commenting. As you know I cannot provide legal, tax or financial advice. However, I never recommend leaving a company in “inactive” status. Not only does the liability protection no longer apply, the company is still responsible for any all taxes and fees while the company is inactive. Additionally, the longer a company stays in inactive status, the more penalties and late fees generally accrue. If you have any further questions, please feel free to reach out to Milton in my office at (888) 449-2638 ext 104. Thanks so much and have a great day!
I open a business in November 2016, but then after I actually find a good job so I never used the business, how do I go about closing that business? that a S Corporation
Hi Catarina – thanks for reading and commenting. You need to dissolve the business by filing articles of dissolution with the secretary of states office. In most cases, failure to properly dissolve the corporation can cause additional fees and penalties. If you would like assistance dissolving your company, I would be happy to assist! Feel free to email me at: info at corpnet dot com
Great article, and very helpful. Thank you for posting, Nellie. I started an LLC, then soon after I learned a corporation would work better for me – so I started one. I plan to use the name of my LLC as a fictitious name/DBA for my corporation (I just really like the name but needed to name my Corp something different). Since I will use the llc’s name as a fictitious name under my corporation – is it best to dissolve the LLC? I have transacted no business under the LLC, ever.
if an LLC was created but never actually put into operation, does it have to be dissolved in the same way? Lawyer told us to create an LLC so we did but it wasn’t necessary according to accountant for what we were doing so nothing every happened with it.