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Amid this unprecedented time, many small business owners have made the difficult decision to close their business. Some businesses have closed permanently during COVID-19, while others are temporarily shut down.

A temporary closure means doing a bit more than hanging up a “closed” sign on the storefront’s door. Businesses that have closed, even on a temporary basis, will not be seen as closed in the eyes of the state. They will be considered active until they file for a dissolution. There are proper procedures that should be followed for a voluntary dissolution.

Here’s what small business owners need to know about temporarily dissolving their business for COVID-19 reasons.

Secure a vote to dissolve the business.

Let’s say that your business was incorporated as a limited liability company (LLC). The owners, or members, would need to meet to discuss closing the company and pass a vote agreeing to dissolve the business. They may also refer back to the written LLC operating agreement for additional guidelines. Terms for what a dissolution should look like may already be included in an operating agreement. Some terms may include how assets will be divided once the LLC’s debt is paid and if members will be allowed to start a business of their own based on the idea behind the dissolved LLC.

Similar rules apply if a small business is incorporated as a corporation. A meeting is called for the board of directors. The directors meet to vote on the dissolution and record minutes for corporate records. Public corporations will also draft a dissolution proposal. This document formally announces the intent to dissolve the business and the proposal is made part of the public record. A majority vote needs to pass in order to agree to the corporation’s dissolution. Much like how an LLC refers to its written operating agreement for processes moving forward, a corporation may do the same with their corporate bylaws.

Whether you have incorporated as an LLC or corporation, it’s important to remember that you cannot decide to close a business alone. You will need to secure the passing vote of other members before you can begin filing voluntary dissolution paperwork.

Are there any entities that may file for voluntary dissolution without having other members vote? Just one — a sole proprietorship. A sole proprietor does business individually. They are solely responsible for the voluntary dissolution of their business.

File articles of dissolution

Once you have agreed to a passing vote to dissolve the business, you will need to file articles of dissolution. These articles are filed with the local Secretary of State in the state in which you do business.

Standard articles of dissolution include the following information.

  • The name of the LLC or corporation.
  • Date the dissolution will take effect.
  • Reason for dissolution.
  • Information about any legal actions currently pending (optional).

What if your business is registered to do business in a state outside of its incorporation state? Then you will need to file for an application of withdrawal in that state. This document may also be referred to as a certificate of termination.

Why do articles of dissolution matter? This bit of paperwork must be filed in order to complete the termination of the business. As I mentioned earlier, the state still views businesses as active until they file for a dissolution. As an active business, you would still be liable for paying state fees, franchise taxes, and filing annual reports. Failure to do any of these could place your business into bad standing. It can cause the state to involuntarily dissolve the company, even if you meant to voluntarily dissolve the business yourself!

Complete the “Closing a Business Checklist” from the IRS

As you begin taking actions necessary to close your business, you might like to have a checklist handy to ensure you do not forget anything. Use the Closing a Business Checklist from the Internal Revenue Service (IRS). This checklist provides a list of forms to download and stay on track with filings and tax returns.

Before fully dissolving, you will need to make sure your small business takes care of the following items:

  • Canceling all business licenses and permits with the agencies that issued them.
  • Did you file a doing business as name (DBA) for your company? You will also need to file an abandonment of a fictitious business name with the Secretary of State.
  • Notify employees. Let employees know the date they will receive their final paycheck and the method of payment (which may be a physical check or direct deposit) as well as issuing final wage and withholding information. If you have any contractors or freelancers, issue payment information to them as well.
  • Pay off any remaining business debts and financial obligations. If you are unable to determine a settlement with creditors, you may need to find another method for acquiring funds or file for bankruptcy.
  • Liquidate and distribute any remaining business assets with the appropriate LLC member and corporate shareholder. This distribution will be made based on the percentage of ownership.

Remember: you may reinstate at a later date!

You took the steps necessary to voluntarily dissolve your small business on a temporary basis. The good news is that you may reinstate at a later date. If you would like to reinstate your LLC or corporation and are aware it was in good standing prior to being dissolved, you may do so with a reinstatement filing. Keep in mind that the materials needed for your application materials will vary on a state to state basis. Check in with your Secretary of State to make sure you have all the correct information. Then, apply to reinstate your company — and reopen your doors for business.

About the Author(s)

 Deborah  Sweeney

Deborah Sweeney is the GM & VP, Small Business Services at Deluxe Corporation. She is an advocate for protecting personal and professional assets for business owners and entrepreneurs.

General Manager and Vice President, Small Business Services at Deluxe Corporation
How to Temporarily Close a Business Due to COVID-19