December 20

December 2020
THE VALLEY BUSINESS JOURNAL
www.TheValleyBusinessJournal.com
11
Do You Own an Inactive Business? Is it Time
to Close it Before the End of the Year?
Esther Phahla,
CPA, CTS, MST
With the end of the year fast approaching,
it’s time to dissolve any
inactive business to avoid having to pay
extra fees and paperwork for 2021. When
a business entity is no longer needed, has
completed its business dealings, has completed
its job in a foreign State, or even if
it was never used for anything, it is very
important that it follows the legal steps
in “winding itself up” as a legal entity
through dissolution or cancellation or if
it is a foreign entity through withdrawal.
All corporations, limited-liability
companies, limited partnerships, limited-liability
partnerships and other business
entities are legal entities which can
only be dissolved through formal action,
not by a letter or phone call. You remain
liable for all taxes, assessments, fines,
penalties and interest until you receive a
certificate of dissolution from the Secretary
of State.
Here are some of the requirements to
legally dissolve a business with the IRS,
State and Local authorities:
1. Hold a vote to dissolve the business:
If the business was operating as a
corporation or limited liability company
(LLC), the shareholders or members need
to approve the formal dissolution of the
business. The first step is to hold a meeting
to vote on shutting down the business;
the final vote needs to be recorded in the
meeting minutes.
• For corporations: Two-thirds of the
voting shares need to agree to close the
business. If shares were never issued,
then the corporation’s board of directors
need to agree.
• For LLCs: Specific rules vary by state
and can be found in the state’s Limited
Liability Company Act. Or, if you
specified a dissolution procedure in
your operating agreement, you’ll need
to follow that procedure.
2. File Articles of Dissolution
paperwork with the state: After the
members, shareholders or board of directors
vote to dissolve the business, the
LLC or corporation will need to file the
Articles of Dissolution or Certificate of
Termination with the Secretary of State’s
office wherever the LLC or corporation
was formed.
In addition, if you filed a foreign
qualification to operate in another state,
you’ll also need to close these foreign
qualifications. To do so, you’ll need to
file paperwork, such as, Certificate of
Surrender of Right to Transact Intrastate
Business, with that state’s secretary of
state office.
3. Settle all debts: Before you can
distribute assets among members or
shareholders and put money in your own
pocket, you need to settle any outstanding
business debts. If your business owes
any vendors, those accounts need to be
settled and paid.
4. Collect accounts receivable:
You should work to collect on any past
due invoices before announcing you’ll
be shutting down the business. It will
be difficult to collect after it’s known
the business will close. If necessary, an
effective strategy is to offer a discount on
any outstanding bills in order to collect
as much as possible.
5. File Final Payroll Tax Returns:
If you had employees, submit the payroll
tax returns after you have paid them their
final wages and salaries.
6. Submit Final State Sales Tax
Forms: If you collected sales tax from
your customers, find out what your state
tax agency requirements are in order to
close your tax account. Submit your final
state sales tax forms with the tax that you
have collected from your customers.
7. File the final tax return: When
a business closes, it needs to notify the
IRS. For LLCs and corporations, this is
typically done by checking “final return”
on the final tax return. In addition, the
business will need to report shareholder
allocations and losses for members on
Schedule K-1.
8. Close all business permits and
licenses: Another important step toward
dissolving a business is to notify the local
business authorities and cancel any business
permits. If you don’t cancel these
licenses, they’ll still be expected to be
paid any associated fees.
9. Distribute the remaining assets:
After taxes, debts and final payrolls have
been paid, the business distributes the
remaining money and assets among the
business owners. LLCs distribute money
and assets to members according to everyone’s
proportional ownership share.
Corporations distribute money and assets
to shareholders based on the number of
shares owned.
By following these steps, you can
properly dissolve a business with the
state and IRS. If you have already moved
on from the business, you should close
it out before the end of the year to avoid
having to pay unnecessary fees in 2021.
Esther Phahla is a Certified Public
Accountant and Certified Tax Strategist
in Temecula. She is the Author of tax
planning books: “ Why Didn’t My CPA
Tell Me That” and “10 Most Expensive
Tax Mistakes That Cost Business Owners
THOUSANDS”. She also holds a Master’s
of Science in Taxation. She can be
reached at (951) 514-2652 or visit www.
estherphahlacpa.com