Dissolving a business, such as a corporation or LLC, can be challenging for startup founders. The emotions involved are difficult enough but the stress of the unknowns founders face to actually close the business further compound the situation. We can empathize with that-- we've seen many startups face this reality over the years. It is important to take the right steps to ensure that all affairs of the business entity are addressed to avoid headaches and hassle down the road. To help founders navigate this difficult task, we've compiled a helpful checklist founders can use to unwind their business.
Step One: Adopt a board resolution to dissolve the entity
For corporations, it is important to first get the approval of the board of directors and or the shareholders before starting the process to dissolve a company by adopting a board resolution. A board resolution is a document that formalizes the company’s decision to dissolve the company and acts as a precursor to get the ball rolling on the dissolution process. It memorializes the decision-making and is required to be attached to certain regulatory filings (if applicable), such as Form 966 with the IRS to report the dissolution. If the entity is organized as an LLC, memorialize the dissolution with the LLC's member(s). This often starts with reviewing the operating agreement for any specific details surrounding the dissolution process. However, working with an experienced attorney to guide you through the process is our recommendation.
Step Two: File the Certificate of Dissolution with your state of domicile
This process is different based on the states that the business has formed in (also known as your state of domicile) or registered in. There are certain states (such as NY) that require tax clearance for the company before the certificate of dissolution can be filed. This means any back taxes owed by the business must be paid first before getting the clearance letter. It is important to know what the rules are in the states that your business files taxes in, formed operations in, or conducts business. Since this can be state-specific, it's recommended that you work with a tax advisor and legal counsel to make sure this is handled properly.
Step Three: Wind up business affairs
Depending on the state, this step could come before or after the filing for the certificate of dissolution. See below for examples of additional steps that may need to be taken to close business operations. Again, since this is state-specific, we highly recommend discussing the specifics with a qualified professional about notifying creditors and employees and addressing any other legal matters required by state and federal laws.
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Settling outstanding debts
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Notifying customers, suppliers, landlords, insurers, and vendors
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Notifying employees
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Canceling licenses, permits, city business registrations
You will also want to make sure you understand the costs you'll incur to handle these different activities and set aside the funds to cover those costs.
Step Four: Distribute or sell the remaining assets
If a company owns tangible or intangible assets, then it is highly recommended to sell the assets prior to filing the final tax return as technically the company’s balance sheet must be zeroed out on its final year tax return. There may be an instance where the assets have to be distributed to the shareholders/partners as well. We recommend working with your tax advisor to understand how this applies to your situation.
Step Five: File final federal, state, and local tax forms
An often overlooked but important step many founders overlook is filing final federal and state tax returns. This is important to formalize the closing of the business with the IRS and your state. Depending on your filing past tax filings, there also may be some final documentation needing to be filed with local tax agencies. For instance, if the entity is a corporation, then a corporation that dissolved during the year generally must file its final tax return by the 15th day of the 4th month after the date it dissolved or face potential penalties. A best practice here is to hire a tax professional and at the very least, file an extension to file the final tax return so the company has ample time to wrap up its affairs.
Another important step to understand and act on is to finalize the accounting and analyze any potential tax considerations triggered by the dissolution. For example, there could be some tax consequences to shareholders and/or the business itself if there is an undistributed retained earnings balance, sale of assets, outstanding loans to and from shareholders, outstanding SAFE notes, convertible notes, and/or distribution of property to others. Again, it is always a good idea to consult with a qualified tax accountant to close the loop on these items before the entity files its final tax return.
If the entity is an LLC taxed as a partnership, then the dissolution process from a tax perspective will add another layer of complexity arising from the relief of any partner liabilities (loans, etc, if applicable), etc. Once again, please discuss with your tax advisor. Once the final tax return is filed, the partners will get a final K-1 from LLC as well. Lastly, make sure to close payroll withholding and unemployment tax accounts and mark the federal 941 forms as final to avoid receiving future notices for failing to file these returns.
Step Six: Memorialize your business records
It is important to keep good records of all documents involved with the dissolution of the business. It is recommended by the IRS to keep all records for at least 7 years. Furthermore, is recommended to check with your attorney to ascertain the documentation retention requirements as there may be certain non-tax documents that you need to finalize and retain.
Conclusion: Work with our team at Founder's CPA
While it pains us to admit it, we've had the unfortunate experience of assisting many businesses facing this reality. We understand how difficult it can be and are willing and able to guide you through the process. If you want to learn more about how our team can help, please don't hesitate to contact us.
