Why You Should Dissolve an Unused Business Before Year’s End

It's an unfortunate fact of life that not all businesses will be successful. Sometimes, you give it the old college try, and it just doesn't work out.

It's OK. According to the U.S. Small Business Association (SBA), 30% of new businesses fail before year two.

Other times, a business never actually gets off the ground. You formally filed a corporation, LLC, or nonprofit with the greatest of intentions, but ended up going in another direction and never did anything with the entity. Maybe you started it years ago, but still receive something in the mail from some governmental entity about your defunct company.

Regardless of the reason, you need to formally dissolve your old company to avoid paying unnecessary fees and taxes. The time to do it is now — before the calendar turns the page on another year.

Why Do I Need to Dissolve My Company?

When you formally registered your nonprofit, LLC, or corporation, you created what the government recognizes as a living entity. You may have stopped operating it or never actually began, but the government doesn't recognize it as closed. Until the entity is officially dissolved, the government will continue to treat it as alive (and taxable).

If the government considers your company still active, you are required to file periodic reports like annual statements and pay annual fees and income taxes. Ignoring that inactive company for years means those fees might be adding up, and you could be held personally liable for them.

It's not only the government with their hand out. There may be others trying to collect against your company. Many legal claims have a statute of limitations of four or six years, meaning someone can sue your company for something that happened back when people were doing the mannequin challenge. That is, unless you put a stop to it and officially dissolve your company.

Why Dissolve My Business Now?

Legally, if your business is technically active for even one day, you will likely still have to fill out a tax return for it for the entire year. That means if you wait until January 1 to dissolve your company, you could be on the hook for another year's worth of taxes, fees, and filings.

Avoid adding another year's worth of filings by dissolving now, before the year ends. Not only is it prudent, but you will personally feel better knowing your closed business is one administrative headache you won't have to deal with next year. You can start the new year with a fresh start and maybe even start over with a new LLC, nonprofit, or corporation.

How Do I Dissolve My Business?

You only need to take a few simple steps to formally dissolve your business and rid yourself of the worry, paperwork, taxes, and fees. You can do it yourself, consult with a lawyer, or employ a filing service to take care of it for you.

Here are the basic steps:

1. Pay any outstanding liabilities

Before you file the paperwork to formally close your business, you need to take whatever money the company has to pay outstanding liabilities. Before any leftover funds or assets are given to the company owners, you should do your best to pay all past due bills.

First, pay any amount owed to the government. Some states will not allow you to dissolve if your entity still owes the government money. Next pay any remaining business debts and payroll.

You may have to sign paperwork attesting that you have paid off all of the company's debts. If there is a lot of debt and nothing left in the company, you may want to consult with a lawyer about the best way to dissolve.

2. Formally file the dissolution paperwork with the state

To formally dissolve your business, you need to file the right paperwork with your state. While every state has its variations, it's called Articles of Dissolution or a Certificate of Termination in most places. This document gets filed in the Secretary of State's office in the state where you initially formed your business.

For businesses with more than one owner, it's recommended that you memorialize a vote to approve the dissolution. In most situations, all owners will agree that it is best to dissolve the business, so a simple statement authorizing closure signed by everyone should suffice.

If there is some disagreement, you need to make sure the required number of people vote on the dissolution. The necessary vote will be spelled out in the company's bylaws, operating agreement, or the default rules of the state where you formed the company. In many states, a majority vote by a corporation's board of directors or two-thirds of the shareholders can approve a dissolution. For LLCs, the default rules may be a simple majority of the managers or the members.

3. Follow-up on other paperwork like licenses and permits

Some states and counties require you cancel things such as reseller's permits to stop the assessment of fees. While you are taking care of the high-level paperwork, don't forget to knock out the little things, too.

4. File the final tax returns

You will have to file a final tax return for the current calendar year. Dissolve now to avoid having to also do a tax return for next year. Most tax forms have a box you can check to let the state or the IRS know this is the final tax return. If you had any employees, you will also need to file a final employment tax return.

5. Inform interested parties

Of course, there are some steps that, while not technically a legal necessity, are the professional thing to do before closing. These include notifying any customers, key vendors, or other parties who need to know. You may want to start another company someday, so it's always a good idea not to burn any bridges.

Just Rip That Band-Aid Off

There are certain things in life, no matter how distasteful, you just need to do. Taking the necessary steps to formally dissolve your business is one of those things. Get it done before the end of the year to save another 12 months of worry and headaches.

Formally dissolving your business isn't hard, but it surely isn't fun. Avoid the hassle and let Swyft Filings' team of experienced business professionals help dissolve your business so you can focus on moving forward to your next endeavor.