Every year, more small businesses close than open. If you find yourself in the position to close your small business, read our step-by-step guide to help.
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In this article we’re going to go over how to close a business. It isn’t a topic anyone wants to cover, but it’s important to understand the process if it happens to you.
With the COVID-19 pandemic shutdowns and economic recession, small businesses in every industry are facing this reality: the business must close.
Keep reading to learn what you need to do to make sure that closing your business isn’t any worse on you, your employees, your customers, and your finances than it needs to be.
Where Do I Even Start?
Closing down a business isn’t just locking the doors, physical or digital, selling off your equipment, and cutting your losses.
It involves taking legal and administrative steps that may vary depending on the nature of your business and the particular local, state, and federal laws that apply in your situation.
It’s a lot to handle — and it comes at a time when you’re unlikely to be prepared for the emotional toll of it all. However, we’re here to help.
The Essential Do’s & Don’ts Of Closing Down A Business
Closing your business is never an easy thing to do. Here’s a quick rundown of what you should and shouldn’t do. Don’t worry; we’ll go into more detail later.
- Do: Communicate the situation with employees and customers
- Do: Make arrangements with any service providers
- Do: Notify the relevant government agencies as required by law
- Do: Talk to a lawyer and/or an accountant
- Do: Make a plan of action
As for the don’ts:
- Don’t: Panic (We know, easier said than done, right?)
- Don’t: Just lock up and disappear
- Don’t: Ignore any bills or creditors
Give Notice That Your Business Is Closing
Emotionally, this may be the hardest part of the whole process. Nonetheless, those affected by your business’ closure deserve nothing less than your full honesty.
If you have partners and/or investors, you’ll need to get everyone on the same page first, but if you run your business alone, the decision will be a little less complicated.
As you likely realize, your employees should be the first to hear the news. You’ll need to let your employees know what your closing date is and ensure that arrangements are made to give them their final paychecks along with any severance pay you’re going to offer.
Regarding final paychecks and severance pay, state law may dictate how you handle these arrangements, so you may need to consult an attorney for guidance.
Other important things you’ll need to hash out with your employees include the need to reimburse them for any work-related out-of-pocket expenses they may have incurred and collect the company property they may be using, such as vehicles, laptop computers, and work phones.
Have a look at the U.S. Department of Labor’s Employment and Training Administration Fact Sheet to learn more.
Your customers will also need some advance notice of your plans. Make an announcement, a public one, and one to subscribers to your customer mailing list, should you have one, and fill everyone in important details.
Let your customers know how long your gift cards will be honored, recommend other businesses in your industry, and even let them know what’s next for you or your employees if it’s applicable.
The most common way you’ll see businesses announcing a closure at this point is through social media posts. This gives your customers the chance to share your posts with a larger audience and reach customers who may not follow you.
Notify Government Agencies
This may vary depending on your industry and where your business is located, but you will likely need to notify federal, state, and/or municipal authorities about your closure. Steps you may need to take include filing dissolution notices and canceling any relevant permits, licenses, registrations, and even trademarks. Again, contact a lawyer if you’re unsure of your exact legal obligations here.
This step may be one of the trickier ones. How you deal with your creditors in this situation will depend on your type of business and the type of debt you owe.
Depending on your circumstances, your creditors may have to wait a set period before attempting to collect, or they may be able to try to collect immediately. If you have a financial advisor you can contact regarding your debts, now would be the time to do so.
Notify Service Vendors
The paid services you use on a continuous basis (cleaning services, payment processor, accountant, etc.) will need to be notified of your business’ intent to close.
Some of your service cancellations will likely be quite straightforward. Others, like your credit card processor, may be trickier. Your processor may have put an ETF (early termination fee) into your service contract. You may be on the hook for this, though some merchant accounts and processors are more generous than others in this regard.
As for contracts with your point-of-sale or eCommerce provider, if you’ve been paying per year, you won’t get a refund on the remaining portion of your agreement, but you also won’t face any additional charges.
With other software contracts and services, cancellation terms may vary, so you’ll need to ask your vendors questions about anything you’re unsure about.
Close Up Your Physical & Digital Shop
As your business approaches its final operational day, you’ll need to do what you can to wrap things up. Depending on the stock and supplies you’ll have on hand, you should consider measures such as a clearance sale to clear your remaining inventory.
Return Leased Or Rented Equipment
If you have any hardware or other equipment that you’re renting or leasing, it will need to be returned. In the case of credit card terminals, any free equipment needs to be shipped back in a timely manner, or you may be hit with some outrageous fees.
See our article on credit card terminal leases to get a sense of the pitfalls here.
Liquidate Any Remaining Assets
You’ll need to sell off the remaining fixtures in your business as well. If, after your closing date, you have any remaining assets, you can try to sell the items online or work with a liquidation company to get back some of the value.
Luckily, you should be able to sell your remaining inventory online, and if your warehouse is still full of stock, you have the option of contacting a merchandise liquidator.
Close Up The Property
Finally, you’ll have to take the step of dealing with your lease. Contact the property owners to come to an arrangement. If the property belongs to you, you may not need to take immediate action.
That being said, with the real estate market as volatile as it is, getting it on the market sooner rather than later might be better in the long run.
Handle Your Business’ Outstanding Financials
As you close up shop, you’ll have to deal with any outstanding financial business. You may have several such concerns, which is why the order of resolution is crucial.
Collect Any Outstanding Accounts Receivable
Many businesses may have outstanding balances owed by clients. You’ll want to try to collect these invoices if you have any hope of seeing that money again.
If possible, you should try to collect before your official going-out-of-business announcement so your clients don’t feel as though they can just wait for you to disappear. Offering discounts to those who pay immediately may also be wise, as it increases the likelihood that you’ll get at least some of your money back.
You do have another option in this situation: you could sell these balances to an invoice factoring company. Check out our article on invoice factoring if you’re curious as to how this process works.
File Income Tax
At this point, you’ll need to complete your final income tax filing. Read our complete guide to small business taxes for more information and find other tax tips for small businesses.
Remember that this process will vary depending on the structure of your business. Do your research; your process as a LLC is going to look different than another business in your industry that is a sole proprietorship.
File Sales Tax
Likewise, you’ll need to do your final sales tax filing. We’ve published a small business sales tax guide for those who need more information.
If your state doesn’t have sales tax, like Oregon, then you don’t need to worry about this step.
This step will involve making out your final checks to your employees, completing payroll taxes, and issuing severance pay. Again, you’ll need to follow federal, state, and municipal laws regarding your workers’ final checks and severance pay.
Your final payroll should resemble your year-end payroll. To that end, here’s a guide to doing your year-end payroll.
Pay Any Outstanding Debts
Your debts will need to be paid before you can claim any of your remaining financings. Pay off your loans and all other bills to the greatest extent that you can.
Monitor & Keep Records Of Your Business
Even after your business shutdown is finalized, you may still have business-related matters to deal with, unfortunately.
A number of laws may require you to keep your financial records and tax filings for a certain length of time. Consult a lawyer or CPA in your state of operation if you’re unsure what you need to keep and for how long.
You should also monitor your business bank account for any suspicious deductions from companies you’ve worked with in the past. Unfortunately, many business owners find themselves still being charged by service providers 1-2 years after closing, so you’ll want to nip this in the bud if it happens to you.
Additional Resources For Closing Your Business
What If I Want To Sell?
If you don’t want to see your business disappear, you can decide to sell it instead. Selling is another complicated and emotional process you may not have the mental bandwidth for, but it is another way to try and recoup some of the money you’ve spent building your business.
Learn more about selling your business in our complete guide to selling your business.
Closing Down Your Business Isn’t Easy, But Doing It Correctly Is Important
You may not feel highly motivated to do your due diligence, which is entirely understandable. Nonetheless, if you don’t want to find your business running afoul of employment law (or if you don’t want creditors harassing you and asking for money at a time when you’re least equipped to deal with it) you’ll want to make a good-faith effort to close down your business the right way.
Again, the more complex your business, the greater the likelihood is that you’ll need to enlist the help of an attorney and/or a CPA.
Looking for more help? Check out these resources from Merchant Maverick:
How To Close A Business: FAQs
Can I just shut down my business?
No, you cannot just shut down your business. There are steps you have to complete in order to follow federal, state, and municipal laws and do right by your employees and customers.
What do you say when closing a business?
When closing a business, you need to state that your business is closing, the exact date it will be officially closed, and suggest another business that can fill your customers’ needs if applicable.
Do I need to cancel my EIN if I close my business?
No, you do not need to cancel your EIN if you close your business. The IRS cannot cancel an EIN and it will stay with that business forever, meaning it can be used again in the future if the need arises.
Do you have to notify the IRS when you close a business?
Yes, you have to notify the IRS when you close a business by filing Form 1065, U.S. Return of Partnership Income, for the year you close your business.