Closing a Business

Cite this article as:"Closing a Business," in The Business Professor, updated August 19, 2014, last accessed June 7, 2020,


Overview of the Decision to Close Down Your Business

You may determine that you no longer can or want to run the business. In that case you may decide that shutting down the business is more advantageous that attempting to sell the on-going operations to someone else. In this case you will need to follow several steps to undo all of the activity you undertook in setting up the business.

Checklist for Closing Down

Organizational Decision to Dissolve – Depending on whether you are operating as a sole proprietor, partnership, or other business entity, you will need to follow the requisite formality in reaching a decision to dissolve the business. In a sole proprietorship, the owner can unilaterally decide to dissolve the entity. In a partnership, any partner may be able to cause dissolution and trigger a winding up of the business by any number of activities.  In an LLC or Corporation, however, the decision to close the business generally entails the decision of the members or shareholders to dissolve. Any such decision must be documented in accordance with the default entity rules or the governing documents for the business.

Wind Down Business Affairs – Winding down the business affairs entails the procedural steps for stopping operations, notifying all interested third parties, settling the affairs of the business, and extracting any remaining business value for the business owners.  Below are the major steps that one must undertake in shutting down any business.

  • Halt Operations – This means stopping the process of selling your product or performing your service. Generally this will requires extensive notification of all interested parties. For large employers, this may entail legal notification requirements, such as under the WARN Act or similar state law.
  • Notify Interested Parties – The list of interested parties goes much further than just your employees. You will need to notify any Debtors, Creditors (particularly lien holders), Suppliers, Customers, and Employees. Often state law will require a business to publish notice of dissolution in a newspaper of general circulation for a specific amount of time.
  • Cancel Contracts (service/supply/purchase contracts, leases, etc.) – Individuals affected by the cessation of operations need to know that business is permanently halted. You may need to extend contractual performance and payments out until the date of dissolution.
  • Inventory All Assets and Liabilities – The creditors and owners of the business will want to preserve all of the residual value of the business to be dispersed to claimants in order of their priority. Determining the net value available for distribution is the first task.
  • Sell Inventory – In a heavy inventory business, there may be substantial value in unsold inventory and materials.
  • Liquidate Assets – Once operations have ceased, you can now sell of the operational equipment. It can be difficult to find a purchaser for reasonable value. This process will often require the satisfaction or release of liens by creditors.
  • Collect from or Settle with Debtors – Much of the residual value of the business may be in the form of debts owed by creditors of the business. You will want to collect any unpaid debts or settle unpaid, contested debts for a stated amount.
  • Pay or Settle Business Debts – The residual value of the business is distributed in order of priority of the claimant. Secured debtors are paid first, unsecured debtors are paid next, and finally owners of the business receive any remaining value.
  • Distribution to Equity Holders – Distribute any remaining assets to owners (equity holders). This may require valuation of remaining assets by a professional.
  • Cancel Accounts – Early in the dissolution process, you will cancel any lines of credit, credit cards, etc., that are not necessary for winding up the business. Some accounts may not be able to be closed until assets are sold or other funds collected. Closing bank accounts should be last, as you will need a place to store the funds collected from the liquidation of assets, collection of debts, etc.

Dissolve State Entity – This requires sending in a notice of dissolution to the State Secretary of State’s Office.

Notify Local Government (Permits and Licenses) – You may need to give your country or city government notice of your dissolution. This will include canceling any local permits, business licenses, or D/B/A filings. There may be other notification requirements specific to your locality.

Settle all Tax Accounts: Settling tax accounts may be the most procedurally daunting part of winding down a business. You must account for capital accounts, distributions, employment taxes, etc. See for a description of the various final tax filing requirements. I recommend searching your state’s Department of Revenue website for information on closing state tax accounts.

Maintain Records – Business dissolutions are frequently challenged by regulatory and taxing authorities. Business owners should maintain records for seven years.

Was this article helpful?