In today’s world, starting a business involves taking risks, and there are times when business dissolution becomes necessary. Dissolving a business requires careful planning and execution to ensure that all legal, financial, and tax obligations are properly addressed. This blog helps to identify the necessary steps and paperwork to dissolve a business.
If your business is a Limited Liability Company (LLC) or a corporation, the shareholders must first approve the dissolution before the process of closing the business can begin. Depending on the state, you may need to file a certificate of dissolution in addition to filing your local and state taxes for the last time. For more information regarding state requirements, please go to your state’s website for businesses.
Although the business is being dissolved, its tax obligations do not immediately end. The federal government will need a final return for the business. Each business type has its own filing requirements for the tax year of dissolution, except for an LLC, which would follow the requirements associated with its classified business type.
Sole Proprietorship
Type of Tax
Form/Reasoning
Income Tax
Schedule C (Form 1040 or Form 1040-SR) – used to report the year’s final income and expenses
Sale of Business Assets
Form 4797, Sales of Business Property – filed annually to report the sale or exchange of business property
It is mandatory to file this form if closure of the business causes the business use of an eligible property under Section 179 to drop to 50% or less
Form 8594, Asset Acquisition Statement – required filing if a business is sold
Self-Employment Tax
Schedule SE (Form 1040), Self-Employment Tax – required filing if the business’s net earnings are $400 or more for the year
Partnership
Type of Tax
Form/Reasoning
Income Tax
Form 1065, U.S. Return of Partnership Income
Capital gains and losses are reported on Schedule D
Check the “final return” box so the IRS won’t expect a return in future years – it’s near the top of the front page of the return, below the name and address
Check the “final K-1” box on Schedule K-1PDF
Sale of Business Assets
Form 4797, Sales of Business Property – filed annually to report the sale or exchange of business property
It is mandatory to file this form if closure of the business causes the business use of an eligible property under Section 179 to drop to 50% or less
Form 8594, Asset Acquisition Statement- required filing if a business is sold
C Corporation
Type of Tax
Form/Reasoning
Sales of Business/Assets
Form 966, Corporate Dissolution or Liquidation – required filing if you adopt a resolution, plan to dissolve the corporation, or liquidate any of the business’s stock
Form 4797, Sales of Business Property – filed annually to report the sale or exchange of business property
It is mandatory to file this form if closure of the business causes the business use of an eligible property under Section 179 to drop to 50% or less
Form 8594, Asset Acquisition Statement – required filing if a business is sold
Income Tax
Form 1120, U.S. Corporate Income Tax Return – must still be filed for the year of business closure
Report capital gains and losses on Schedule D
S Corporation
Type of Tax
Form/Reasoning
Sales of Business/Assets
Form 966, Corporate Dissolution or Liquidation – required filing if you adopt a resolution, plan to dissolve the corporation, or liquidate any of the business’s stock
Form 4797, Sales of Business Property – filed annually to report the sale or exchange of business property
It is mandatory to file this form if closure of the business causes the business use of an eligible property under Section 179 to drop to 50% or less
Form 8594, Asset Acquisition Statement – required filing if a business is sold
Income Tax
Form 1120-S, U.S. Income Tax Return for an S corporation – must still be filed for the year of business closure
Report capital gains and losses on Schedule D
Check the “final K-1” box on Schedule K-1
All Business Entities
Type of Tax
Form/Reasoning
Employment Tax
Form 941, Employer’s Quarterly Federal Tax Return, or Form 944, Employer’s Annual Federal Tax Return – must be filed for the quarter in which you make final wage payments
Check the box to tell the IRS your business has closed and enter the date final wages were paid on line 17 of Form 941 or line 14 of Form 944
Attach a statement to the return showing the name of the person keeping the payroll records and the address where the records will be kept
Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return – must be filed for the calendar year in which you paid final wages
Check box “d” in the Type of Return section to show that the form is final.
Give a W-2 to each employee
W-3
Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips – file if needed
Other Taxes
Any outstanding taxes must be paid
Form 1099-NEC, Nonemployee Compensation, and Form 1096, Annual Summary and Transmittal of U.S. Information Returns – may be required if employing contract workers
You may be required to pay local and state taxes one last time. Please visit your state’s website for more information. You also may need to close any pension or retirement plans that were being offered to employees. Finally, you must cancel your employer identification number or EIN by sending the IRS a letter with the following information:
Legal name of the business
The business EIN
The business address
Reason for closing
Original EIN notice if it was kept
Send your EIN cancellation letter and the original EIN notice if available to:
Internal Revenue Service Cincinnati, OH 45999
Once all necessary returns have been filed and taxes have been paid, your business will be formally shut down. It is recommended to keep your business records for at least seven years after closing.
This information has been prepared for informational purposes only, and is not intended to provide, and should not be relied upon for tax, legal, or accounting advice. If you have any questions regarding the dissolution of a business, please do not hesitate to contact us at Lear & Pannepacker.
