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In my business, I help others form business entities, such as LLCs or corporations. Less attention is typically paid to the un-forming of business entities. This is unfortunate — knowing the right way and the right time to dissolve a business can help you save a significant amount of money and hassle.
The most important thing to remember about timing your business dissolution is to aim for action before the year's end. November and December are good times to bid adieu and start anew.
Related: 5 Ways to Move Forward After Shutting Down Your Business
Why you should dissolve your business before the end of the year
If you know that it's time to put a business on the shelf (or in the incinerator) but you don't move to formally dissolve the business entity until Jan. 1, well, as they say in Texas, you've just shot yourself in the foot, partner.
If that business, no matter how ailing, is still alive on Jan. 1, then you will owe the IRS and your state tax authority a tax filing for that calendar year. And who's got time or money for extra filings, when you could have simply dissolved the thing before January? Depending on what state you live in, you may have other headaches coming down the pike as well:
Minimum business taxes: In some states, if you're still nominally operating by Jan. 1 — even if your business fails to generate one red cent of income throughout the year — you'll get hit with some or another form of minimum business tax. For example, let's say your California LLC wasn't dissolved before Jan. 1. Now you owe the state's Franchise Tax Board $800 for the pleasure of not doing business that year. The state of Massachusetts insists that all corporations (S corps included) cough up a minimum "annual excise" tax of $456. Nevada calls it a "business license fee" and it's $500 for corporations and $200 for LLCs.
Figure out what if any minimum business tax is imposed in your state by visiting your state's SOS (Secretary of State) website. Look for words like "excise tax," "business licensing fee" and "franchise tax," all slang terms for "we're just going to tax you for existing."
License or permit renewal fees: If you don't call it quits before Dec. 31, you might get stuck paying for renewed licenses or permits. If you're closing down your daycare or plumbing business, or your food service business or bar, then you certainly don't want to be paying for licensure to cover a period of time in which you're not operating.
Keep in mind, depending on the breadth of your business's activities and verticals, you may find yourself licensed and permitted by multiple levels of government. Let's assume that your C-Corporation, FlameCorp, has a couple of verticals, all pyromaniacal in nature: If you wait until January to douse your company, then you may owe renewal fees both to the municipal authority that permits your busker to juggle flaming fire clubs for streetside tips, and to the Federal Bureau of Alcohol, Tobacco and Firearms that licenses your fireworks importing operation. Make sure you understand the specific fees and relevant timelines imposed by each permitting and licensing authority so you don't get burned.
Registered agent fees: My business charges $149 a year to act as your registered agent, receiving official documents, legal notices, shielding your privacy, etc. Whether you're using my firm or another, registered agent contracts automatically renew at the start of the year. Don't pay me for no reason. Instead, be a pro and dissolve your business by year's end, then promptly notify your registered agent to stop service for the upcoming year.
Annual (or bi-annual) report fees: These fees aren't as hefty as the Minimum Business Taxes and licensing and permit fees; nevertheless, why should a hardworking entrepreneur like you throw away money? In California, for example, if your corporation isn't dissolved by the last day of the second anniversary month of its formation, then you're on the hook for the bi-annual $30 annual report filing fee. Had your dissolution been timely, that's $30 that could've gone towards your "I-Deserve-This-Latte" fund.
Dissolution vs. conversion
Maybe now is not the time to throw in the towel, but an entity-formation restart is in order. I'm often approached by entrepreneurs who want to convert their current business entity into a new entity type. For example, a solopreneur forms a corporation on a whim, but soon realizes that the tax and reporting structure are a bit too complex for his tastes, and he'd like to convert his corporation into a single-member LLC. In several states, this can be accomplished through a process called, get this, "conversion," whereby the existing entity need not be formally dissolved.
About 35 states have "statutory conversion" laws on the books that explicitly permit conversions of this kind. Other states, however, require you to jump through a few more hoops. Take New York, for example, where S corporation owners are required to go through a merger process if they seek to convert into an LLC entity. First, the owner must establish the LLC, the new entity, in its own right. Then, the LLC will need to acquire the existing S Corp through a merger, requiring a Certificate of Merger to be filed and all the rest.
For the cleanest possible transition, convert your business entity before Dec. 31. This will simplify your tax filings (who wants to pay an accountant to file both a Schedule C and a Form 1120 for the same business?) and will help streamline other compliance and administrative matters, such as the liabilities listed earlier in this article.
How to dissolve
Again, your state's SOS website will walk you through the specifics of the dissolution and business entity conversion process. In general, you will need to file articles of dissolution with the state. If your business is a corporation or an LLC with multiple owners, then a record of a shareholder or owner vote will be required. You'll need to pay any outstanding taxes and notify the IRS by filing a final tax return for your business that will be marked "final return." You should also cancel your EIN (Employer Identification Number) by contacting the IRS. Your state's SOS office will provide you with an exhaustive list of steps.
Congratulations on simplifying your life! Closing an unprosperous business can free up your focus and energy for your next big entrepreneurial adventure. Dissolving your business before year's end will protect your time and your pocketbook.
