Starting a business involves many decisions like how much capital is required, which type of format will be followed, what are the legal formalities to be completed and so on. But when it comes to closing a business the sole proprietor is in a difficult position. According to a leading magazine approximately 7 out of 10 businesses fail during the starting years. And during the first five years around 80% of new businesses declare bankruptcy. Even after detailed planning and analyzing the competition what are the causes behind this high failure rate. This dismal rate is mostly due to external factors like when the economy suffered recession which costs a lot of employees their jobs and lot of small businesses faced closure.
Steps to Close a Sole Proprietorship
Other factors such as loss of customers, firm facing losses for a long period and unplanned decisions. Even though closing a business is termed as a smooth process for an individual but it's certainly painful to take such a decision. Winding up a small firm involves the business person to undergo certain legal formalities too in order to avoid any penalty from the IRS. One thing to remember while filing for dissolution is, it is important to read the laws of the state your business is operating in, as every state has different law for dissolution. Therefore there are certain steps which should be followed if you are winding up your firm temporarily or permanently.
File your Taxes on Time
Even if you are going to close your business it's crucial to file your taxes on time. You need to file Schedule C which is with your 1040 form. If your business is earning more than $400 and even less than the stated amount a year you need to file taxes. Even if the business has faced loss, you need to file taxes so as to claim rebate. Only if your business is inoperative then you don't need to file for taxes. You also need to notify the state secretary, state tax authority and licensing entity about the closure. You need to file federal unemployment tax return and employer's federal tax return so as the employment authorities have knowledge about your firm getting closed.
Notify your Creditors
After you have settled the taxes it's important to inform your suppliers about discontinuing the orders. Ask them to submit their undue bills for payment and check the contract if certain goods can be returned. Mostly when creditors come to know that you are getting out of business they demand their payment in cash. Also inform the utilities providers, insurance company about your exit. Do inform the insurance agent about the liabilities which can emerge during the winding up so as to avoid any legal problems with the insurance company. When you are in the process of shutting down the firm submit your Certificate of Authority which entitles you to carry out business.
Notify your Debtors/ Customers
If there are any pending orders try and complete them or refer your customers to other competitor's. Still if the orders can't be fulfilled then return their advances on time. If there is any excess stock left then try selling it at a discounted price. If there are any pending bills then make it a point to collect them while you are in business so as to avoid any other legal complications.
Your employees will certainly know that you are closing the firm and there will be lot of resentment about this decision. But following a rational approach like informing them two weeks before the closure and referring them to other firms for employment will guarantee you empathy not anger.
Disposal of Assets
As you are in process of closing down the firm it's important to sell your asset and comply to the state law while selling them. Some states require you to publish in newspapers about your intent to dissolve. The money which you realize after selling the assets can be used to pay creditors or some unsettled bills. Therefore inquire about the particular state law as many states require you to file a notice with the Secretary of State stating that all the debts and assets are cleared.
Transparency in Record Keeping
Once you have settled all the dues, do keep a proper record of the money which has been utilized in paying the dues. In accounting language, every expense should be accounted for in the books. This recording will help you while filing taxes and also during an audit procedure by IRS.
Shutting down a business involves a lot of paperwork so do keep all the work organized. As you are dissolving your business, try and maintain a cordial relation with everyone associated with the business. If you need help, do appoint a lawyer to remove you out of any tough situation like a lawsuit by an employee or a creditor.