Your business has been struggling for some time, and you can't seem to break even. The thought of closing the doors of your business is already on your mind. You thought about selling the business, but it's generating too little revenue, and you have few if any long-term contracts. You've also ruled out saving the business by eliminating or restructuring its debts using a Chapter 11 business bankruptcy.
If this sounds similar to what you're dealing with, closing the business is likely the best option. Bottom line, if the company isn't profitable, is taking over your life, or threatening to impact your personal finances, closing can be the best decision for the company, and for you.
If you're ready to make that decision, here are eight steps to follow to close a Texas business properly.
1: Decide to Close Your Texas Business
Making this decision is tough for any Texas business, even if you plan to launch a new business. The type of business entity will determine how you're able to make that decision.
If you have a sole proprietorship (this is also known as a DBA or “doing business as”) all you need to do is make the decision for yourself that it's time to close. Since this is a business under the name of one person, that person has the power to decide to close the business.
If your Texas business is an LLC, PLLC, or LP, either the manager or managing members must agree and vote on the dissolution of the business.
If you have a Texas corporation (typically noted by “Inc.”) votes from board members and shareholders also must be accounted for to confirm the dissolution of the business.
In all of these cases, this entire process should be documented by all responsible parties and added to the company's Corporate Record Book or Binder. Don't have a Corporate Record Book? That's not good, but we'll address this in Step 8.
Once the decision to close has been made and documented, all Texas businesses, regardless of corporate structure, must follow and document the remaining seven steps.
2: Liquidate Unsecured Assets (if you haven't already)
Any assets that aren't tied to a loan are usually considered unsecured. You can liquidate these assets to cover payments to creditors, taxes, and employees, all of which will help make closing your business a bit smoother. It's typically best to liquidate unsecured assets first, as the proceeds can be set aside to pay off creditors, lienholders, and others according to their priority (keep reading).
3: Liquidate Secured Assets
All the business's secured assets should also be liquidated. Any machinery, equipment, or other assets that have a lien against them should be sold if possible. The proceeds from asset liquidation must go to the priority lienholder(s) or creditors where possible. This helps ensure that the business is being managed properly and is not an owner's personal piggy bank. The more you can give those priority creditors, the less hassle your business will face from them as you close. If you cannot sell assets for more than you owe, ask the lienholder if they will take them back and forgive the difference (get it in writing), or consider a liquidation bankruptcy.
4: Take Care of Employees
Once assets have been liquidated, it's time for the business to turn to its employees. There are a number of steps to take here, and the first is notifying the Texas Workforce Commission. This is how the business informs the state that it's closing and will no longer have employees.
Once the Texas Workforce Commission has been notified, it's time to tell your employees of the business closing, if you haven't already. Make sure all employees are informed of the decision and are paid according to their remaining time with the company.
Finally, you'll need to report and pay employment taxes, and then send out the appropriate tax forms to each employee. All employees and contractors must be provided with W2s or 1099s according to their status with the company.
5: File a Final Federal Tax Return
Once employment taxes have been reported and employees receive the appropriate forms, your business must file a final federal tax return.
The type of form you must complete depends on the type of business you have. A Sole proprietorship and an LLC will have different requirements, for example, but you can find complete information on what to fill out and submit on the IRS website.
6: Cancel Your EIN & Close Your IRS Business Account
This step effectively ends your Texas business's relationship with the IRS and makes it clear that your company is no longer in business. To complete this step, you should send a letter to the IRS that includes:
- The full legal name of your Texas business
- The business's EIN
- The business's address
- Why you are closing this account with the IRS
The IRS will not close your business account until you have paid all outstanding taxes, so it's important to ensure that you complete this step only after all taxes have been paid.
7: File Dissolution and Termination Documents with the State of Texas
At this point, your business is closed with the IRS, but you still need to make sure it is properly dissolved according to the State of Texas.
First, you will need to settle everything with the Texas Comptroller office. File any outstanding Franchise Tax and PIF reports. Then file your Final Franchise Tax Report so you can request a Certificate of Dissolution from the Comptroller. Take note, before the Secretary of State allows a dissolution, you must ensure that the business has paid any outstanding tax, penalty, or interest payments and filed the Final Franchise Tax Report within 60 days of the business's termination date.
Second, after obtaining the Certificate of Dissolution, you will need to complete and file the required corporate dissolution paperwork with the Secretary of State. After those termination forms are submitted and your business has paid any filing fees, the Secretary of State considers your business closed. Now, you have one last step.
8: Keep All Records from Your Texas Business (IMPORTANT)
This last step is especially important and often overlooked. Once all documentation is complete, including filing the necessary paperwork, settling with employees and creditors, and officially dissolving your business with both the state of Texas and the federal government. The final task is to compile and document all essential records. This includes your company's operating agreement (or bylaws), annual meeting minutes, corporate resolutions, tax returns, and everything outlined in Steps 1-7 into your Corporate Record Book.
At this point, your Corporate Record Book has served its purpose, and you need only to digitize it to serve as an online back-up for tax and liability purposes.
If you have not been keeping up with your operating agreement, annual meeting minutes, corporate resolutions, etc., strongly consider using a professional to close the business and help mitigate future business and personal liabilities.
This is important should you or your business be sued by zombie debt buyers, or audited by the IRS, as you will need proof of the distinction between you and your business as well as its proper dissolution. In addition to standard documents, such as an LLC operating agreement and annual meeting minutes, at a minimum, make sure to document copies of:
- Real Estate and Business Personal Property tax records
- Employment tax records
- Yearly State and Federal Tax records/returns
- Final 90-days of all bank account statements
- Annual and Final Financial Statements
- Back-up of QuickBooks or accounting systems
- Statements and records of final payments for leases, equipment, purchases, etc.
- Corporate resolutions or other documented decisions
- Documentation of the entire business closing process
Once complete, scan the entire Corporate Record Book, including the dissolution process and documents to a cloud storage system such as OneDrive, Google Drive, Dropbox, or another provider. The more complete your documentation and records are, the safer you will be down the line.
Closing Your Texas Business
At best, closing a business is bittersweet. Making sure your Texas business is properly closed so as to minimize future legal and financial exposure is hard work. But, with that chapter of your life behind you, you can close the book and lock it securely so it cannot rear its head in the future.
If you're having trouble closing your business, especially if you are dealing with SBA EIDL issues or predatory lenders, get in touch with The Lane Law Firm.
