With year-end around the corner, it’s time to remind clients to close their inactive businesses.
Can the holidays get any busier? In addition to making sure your clients are wrapping up end-of-the-year accounting tasks like organizing receipts, collecting W-9s and reconciling bank accounts, you might need to remind them now is a good time to close any inactive businesses or related business activities. Closing a business properly is just as crucial as starting a business properly—your client’s reputation and credit are at stake.
- Your clients could still be personally responsible for filing annual reports, filing state/federal tax returns, and maintaining miscellaneous business licenses and filings for the closed business.
- Your clients are definitely responsible for any fees associated with the inactive business, and delinquency could lead to a bad credit score.
Obviously, it also makes good business sense to let your clients’ customers, contractors and vendors know the business is officially closed so that important business relationships are not damaged.
To officially close an inactive business, your clients need to formally dissolve the company in the states they do business. If the business was operating as a Corporation, LLC or Partnership, all partners, members of the board of directors or LLC members need to formally vote to close the business. The final vote should be documented in the company’s meeting minutes.
If the corporation issued shares, two-thirds of the voting shares need to agree to dissolve the company. If no shares were issued, the board just needs to approve dissolution. Dissolution rules for LLCs vary from state to state, so make sure you’re up-to-date on the rules in the states your clients have businesses and review the requirements with your client, so everyone knows the proper procedure. An LLC’s articles of organization and operating agreement should include the agreed upon rules for how to dissolve the company.
After the official vote, your client needs to file a form called “Articles of Dissolution,” “Certificate of Termination” or “Certificate of Dissolution” with the Secretary of State’s office in the state where the LLC/corporation was formed.
The client’s inactive business must also settle all the company’s financial obligations. As a rule, LLCs and corporations need to pay off debts before any money or assets are distributed. The creditors have first rights to any residual monies. If the former business owners pocket any money or assets without paying off the creditors first, they can be personally sued for payment. If your client does not have the funds to pay off all their creditors, they may have to claim bankruptcy and let the courts divvy up the assets. In the case of the LLC and corporation, personal assets are off limits to creditors, unless your client has personally guaranteed business debt.
Your client also needs to cancel any business licenses, seller’s permits, and any other official certificates that were needed to operate the business legally.
The IRS cannot cancel the Employer Identification Number (EIN). Once an EIN has been assigned to a business entity, it becomes the permanent Federal Taxpayer Identification Number for that entity—even if it is not in use. The EIN is forever assigned to that entity and never reissued, and it can be used at a different date, if needed. Your client must file an annual return for the year the business closed. If the business had employees, final federal tax deposits must be made, and final employment tax returns filed. Your corporate clients must also file Form 966, Corporate Dissolution or Liquidation, Form 1120S for S corporation termination, Form 8594 to report business asset sales and Form 4797, to report the sale or exchange of property used in the business. For the IRS Closing a Business Checklist, check the IRS website.
By being diligent and helping your clients correctly and officially close their inactive businesses by year-end, you can be sure they’ll use your services again in their new projects. Ask about their future plans and be sure to check back with them in 2019 to see if they need any help with financial forecasts or startup financing.