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Fortunately, the overall process for closing a sole proprietorship or partnership is relatively uncomplicated (compared to dissolving a corporation or limited liability company). That’s helpful for sure, particularly if you’re aiming to finalize your business by the end of this year.

Since the business owners in a sole proprietorship and partnership have legal responsibility and accountability for all business decisions, legal matters, and financial obligations, it’s relatively straightforward to end the existence of those entity types. Still, it’s essential to have a plan because loose ends could create unanticipated issues down the road. The exact tasks involved may vary depending on the industry, business activities, whether the business has hired employees, the state’s rules, and other factors.

The steps below represent many of the typical actions required to officially close a sole proprietorship or partnership.

1: Reach Out to Professionals for Guidance

Every business owner’s situation has unique qualities that can impact what they need to do to cover all the bases when closing a sole proprietorship or partnership. To make sure no necessary tasks get overlooked, consult the expertise of a trusted business attorney and accounting professional.

This is especially important for partnerships. The business’s partnership agreement should spell out how to go about closing the business. And it should explain how assets and liabilities should be divided among the partners. Unfortunately, things can become complicated if the partnership agreement is not clear or the partners disagree with how to interpret the agreement’s provisions. Also, states have rules regarding some aspects of winding up a partnership. So, a lawyer’s assistance can help ensure a smoother process and avoid drama.

2: Gain Partners’ Approval

Generally, a unanimous vote is required to approve a partnership’s dissolution. If all partners do not agree with closing the business, then there may be an option for one or more partners to buy out the partners who wish to no longer operate the business. If partners cannot agree on the price or other conditions, it may be helpful to contact a third-party mediator who can negotiate the buyout and move things forward.

3: File Dissolution Forms with the State

Keep in mind that not only does the business’s partnership agreement dictate the process and rules for closing, but the state might also have rules in place for terminating partnerships.

Depending on the type of partnership — e.g., limited partnership (LP) or limited liability partnership (LLP) — the state may require filing dissolution paperwork with the Secretary of State (or comparable agency) and paying a fee. Even general partnerships, which aren’t official business entities, may have to submit dissolution information or a form to notify the state about the company’s intent to terminate. The names of the forms vary from state to state, with most calling them either “Statement of Dissolution,” “Certificate of Dissolution,” or “Statement of Cancellation.” After filing this paperwork, a partnership continues but only to wind up the business.

Again, states’ rules that govern partnerships vary, so business owners must review the applicable requirements in their state.

4: Notify Employees

Even if not required by law to provide advance notice of a business’s closing, sole proprietors and partnerships with employees should consider the impact of blindsiding workers.

Imagine if workers learn about the dissolution from a client, vendor, or the press? Besides potentially feeling disregarded, they won’t be prepared to answer questions and represent the company in the best light possible as it winds down operations.

5: Review Contracts and Agreements

Any contracts with customers, vendors, suppliers, creditors, etc. should be reviewed for provisions related to terminating the business. Business owners can find an attorney’s assistant helpful, as legal obligations aren’t always crystal clear.

6: Let Clients Know

It’s critical to notify these stakeholders ahead of time. If the sole proprietorship or partnership has any remaining contract deliverables to fulfill for customers, they must address those obligations. Also, communicating proactively with clients sets the stage for sending final invoices and collecting outstanding accounts receivables.

7: Contact Suppliers and Contractors

Other parties that will need to know that a business is closing are the folks who provide products and services to it and anyone the company owes money to. Not only is it polite to give them written notice, but there may also be contractual obligations, accounts payables to settle, and possibly even equipment or other property to return.

8: Settle Outstanding Debts

If a sole proprietor or a partnership doesn’t have enough money to cover what they owe to vendors, suppliers, contractors, and creditors, they will likely need to sell some or all the business’s assets. Examples include:

• Office furniture
• Electronics
• Company vehicle
• Office supplies
• Real estate
• Intangible assets, such as patents

Business owners can sell remaining assets left after settling the company’s obligations to generate money for their personal use. In a partnership, the remaining assets or money from selling them should be distributed among partners according to the partnership agreement’s provisions.

If selling a business’s assets cannot generate enough cash to cover debts, the business owners may be personally responsible for settling what’s owed. Remember, sole props and partnerships are considered the same legal and tax-paying entity as their owners!

9: Cancel Licenses and Permits

Sole proprietorships and partnerships that sell taxable goods or services must notify the appropriate state (or local) tax authorities to cancel their sales tax license and ID. Likewise, if a business needed other licenses and permits to operate legally, those should be canceled, too. If a sole proprietor or partnership has filed a DBA (doing business as) — also known as “fictitious name registration” — to market the company under a name other than the owner’s full name, the business owner should notify the state or local agency that issued the name of the business closure.

10: File Your Final Returns

Even though sole proprietorships and partnerships are pass-through tax entities, there will be some tax details to wrap up. They will vary depending on the complexity of the business’s operations, the state, and whether the business has employees.

At the federal level, partnerships must file Form 1065, U.S. Return of Partnership Income, for the year they cease operations, reporting capital gains and losses on Schedule D (Form 1065).

According to the IRS, sole proprietors’ and partnerships’ final federal employment tax filing obligations are:

• File Form 941, Employer’s Quarterly Federal Tax Return (or Form 944, Employer’s Annual Federal Tax Return), for the calendar quarter in which they make final wage payments.”
• File Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, for the calendar year in which final wages were paid, checking off box d in the Type of Return section to show that the form is final.
• Provide Forms W-2, Wage and Tax Statement, to employees for the calendar year in which final wage payments occurred. Also, file Form W-3, Transmittal of Income and Tax Statements, to transmit Copy A to the Social Security Administration.”

After filing final tax returns and making required payments, the business owners should cancel all tax accounts and identification numbers (e.g., employer identification number (EIN).

Some state employment final tax paperwork may also be required, plus canceling of state payroll accounts.

11: Close Business Bank Accounts

If a sole proprietorship or partnership has opened business bank accounts, they will need to close them after completing company transactions. Likewise, it’s important to cancel any credit cards and other financial accounts used strictly for business purposes or created using a business’s fictitious name.

Do It Right With CorpNet

Time flies…and it goes incredibly quickly when there’s limited time to take care of all the details involved in closing a business. Fortunately, my team of filing experts at CorpNet is here to help streamline some of the tasks for you as you finalize your sole proprietorship or partnership.

Get in touch with us now to get on the right track to officially closing your business by the year’s end.

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The answer depends on what the business owner wants from the business, whether other people are involved, state regulations, and how the company is structured. Let’s break it down.

Retiring Strategies

Small business owner retirement strategies may include:

• Selling the company to a buyer who continues to run the business
• Selling off the company’s assets, therefore closing the business for good
• Handing the business down to a family member
• Simply retiring (depends on the business’s legal entity)

Of course, there are other options, such as selling the business to employees or retiring but staying on in some advisory role. To make the transition as smooth as possible, you must know your options and plan ahead. So let’s tackle the topic by business structure.

Retiring From a Sole Proprietorship

The simplest business structure to form and retire from is the sole proprietorship. There are typically no investors or employees to worry about, so you can pay off your debts, sell the business’s assets, and then inform customers and vendors about the sale.

If you sell your property or assets, you will need to file your final business tax return and additional tax forms. Although most sole proprietors use their social security numbers as a tax identifier, if the Internal Revenue Service (IRS) assigned an employer identification number or federal tax id, the business owner must send the IRS a letter announcing the closure. The letter should include the company’s legal name, the EIN, the business address, and the reason for the account closure. Finally, if you intend to retire from working, you must inform Social Security.

Retiring from a Partnership

When partners are involved, closing a business gets a bit more complicated. First, the partnership agreement created by the partners should outline the steps for a partner leaving the business. The loss of one partner does not necessarily mean the company’s closure; however, what happens to the partner’s share of the business is an important consideration. Will the retiring partner be able to sell their shares to an outside party, retain the shares, or be bought out by any remaining partners?

Also, to protect yourself from future liability, it’s crucial to formally file a retirement notice from the partnership with specific dates for retirement. Have your attorney help you with the exact wording so the retiree is protected from the company’s liabilities and the partnership is protected from any liabilities associated with the retiring partner.

Finally, check with your state to determine if there are any issues to tackle when a partner retires from a partnership. For example, without a partnership agreement, some states may require the partnership to dissolve. However, if the company can show due diligence by producing a partnership agreement outlining the procedures for retirement, the partnership should be able to carry on with the existing or new partners.

Retiring From a Limited Liability Company (LLC)

Once again, having documented procedures for retirement helps make the transition smoother for everyone involved in the Limited Liability Company (LLC). LLCs file an Operating Agreement with the Secretary of State’s office. An LLC Operating Agreement is an official contract documenting the management and ownership of the company. It outlines how much of the company each member owns, the members’ voting rights, how profits and losses are distributed among the LLC members, and what happens when someone wants to leave the business (including what happens to the retiring member’s shares).

Because LLCs are regulated by the state in which the company resides, what happens when an LLC member wants to retire varies by state. For example, in California, once a formal intent to withdraw is submitted to the other members, any member is allowed to withdraw, resign, or retire from the LLC despite restrictions in the LLC’s operating agreement. In any case, a new operating agreement should be filed with the state to reflect the change in ownership.

Retiring From a C Corporation

What happens to a corporation when the owner retires? The C Corporation is an official legal entity separate from its owners and regulated by the state in which it resides. Ownership is through holding stock, and the owners are employees of the corporation, giving them a significant degree of personal liability protection.

As employees, owners can retire, and (in theory) the company can continue in perpetuity. The retiring member should submit their resignation from the company and its board of directors, and then new board members are voted in (if need be). All changes to management and board personnel should be indicated in the corporation’s meeting minutes. Like in the LLC, the corporation must file new Articles of Incorporation and Corporate Bylaws with the state.

It is not necessary for the retiring business owner to thoroughly wash their hands of the business. In many cases, the business owner holds onto their stock and can take a role on the board of directors to stay connected to the company.

Selling a Business to Retire

You may need to dissolve your company completely before selling it. For example, if your business is formed as a corporation or LLC, you must dissolve your business entity by getting two-thirds of the voting shares to agree on the dissolution (for an LLC, it depends on what is documented in the Operating Agreement).

Once you’ve decided to dissolve and sell the business, you must make sure you file a notice with the state, file your final tax returns, and notify the IRS. The new owners will need to file for their Federal Tax ID and file the proper paperwork with the government. Failure to file appropriate documentation may result in taxes, penalties, and other fees.

If you’re asking yourself, “Can I retire and still own a business?” the answer is yes, but social security benefits get complicated. Check with Social Security or your accountant to figure out the best path for your retirement.

When you’re ready to dissolve your business or start a new one, CorpNet advisors are here to help file the proper paperwork and take away some of the stress.

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Whether you’ve had to close down entirely or shutter locations in other states, it’s crucial you legally close your business so there are no repercussions down the road.

In many cases, this means you need to take action before we close out the 2021 calendar year.

Here’s what you need to know about business closures, dissolutions, and withdrawals.

Step 1: Vote On It

For a sole proprietor with no employees, closing a business is as simple as starting one. Close up shop, pay off your debts, and let your customers and vendors know. However, if you have partners (even silent ones), own a C corporation or LLC, you should have documented the method of closing in your business’s partnership or operating agreement. The first step must involve getting everyone to agree on the closure. You need to hold a formal vote, documented in the meeting’s minutes, with signatures from all partners and board members.

In addition, if the business is a corporation and had issued shares, two-thirds of the voting shares must agree on closure. LLC rules vary by state, so check with the states where you have business locations for requirements for who needs to agree to closure.

Step 2: Filing the Paperwork

After an official vote for dissolution, you must file the proper forms with the Secretary of State’s office in the state where your business was formed. Similar to filing Articles of Organization or Articles of Incorporation when you started your business, to close your business, you must now file papers called Articles of Dissolution (also called Certificate of Termination or Certificate of Dissolution).

If you fail to complete this step, your business is still open in the eyes of the state, and you are still must file the required annual paperwork and pay any fees.

What if you have locations in other states? Doing business in another state means you have filed for a foreign qualification in that state. Foreign qualification is required when:

• The business has a physical presence (office space, warehouse, or retail store) in the state.
• You or your staff has conducted in-person meetings with clients or customers in the state.
• Your business is structured as a limited liability company (LLC), corporation, or a limited partnership (LP).
• Your business has employees living/working in the state.

Your business’s state of organization is the only state where you need to file for dissolution. However, you need to start withdrawal proceedings to cancel out-of-state registrations. Withdrawing a foreign business typically includes filing a withdrawal application and paying a filing fee. Fees vary from state to state.

It is also vital to cancel all registrations, permits, licenses, and business names acquired in the states you do business. Usually, the act of filing dissolution paperwork automatically cancels your business name in the state. However, if your business registered a fictitious business name (DBA), you may need to file a separate cancellation on the DBA. Whether you should cancel a trademark after a business closure is more complicated, but if you decide to keep the trademark, you’ll need to transfer ownership to the new business or owners. More details are available through the United States Patent & Trademark Office (USPTO) or CorpNet can help.

Step 3: Remain in Good Standing

Before you can dissolve or withdraw your business from the states where you do business, your company must be in good standing, which means you have continued to file the proper paperwork on time. It also means you have settled the company’s financial obligations, such as paying vendors, employees, payroll taxes, as well as sales and use taxes. If for some reason, you don’t have the money to pay off the company’s debt, you’ll most likely need to file for bankruptcy, and the courts will settle the assets. Corporations and LLCs must pay off creditors before any funds or assets can be distributed to shareholders.

Step 4: Inform the IRS

Although your Federal Tax ID Number (EIN) forever represents your business, you should let the IRS know you want to close your business account. To close your business account, send the IRS a letter including the entity’s complete legal name, the EIN, the business address, and the reason you wish to close your account. If you have a copy of the EIN Assignment Notice issued when your EIN was assigned, include that in the letter. If the business is structured as a corporation, you need to file Form 966 for Corporate Dissolution or Liquidation.

Step 5: File Taxes

Don’t wait to file your final tax return. Once the business is dissolved, file any final wage reports, capital gains and losses, employment tax returns, and be sure to check the box labeled “final return.”

If you’re unsure you’re taking the proper steps to close your business or any of your out-of-state locations, CorpNet is here to help take the stress away and guide you through the process.

Learn more about closing your business and filing the official articles of dissolution.

References and Resources:

https://www.cnbc.com/2020/09/16/yelp-data-shows-60percent-of-business-closures-due-to-the-coronavirus-pandemic-are-now-permanent.html

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Whether an LLC’s members want one of their members gone, a member wants to withdraw voluntarily, or a member passes away, the company must carry out the process lawfully. Ideally, an LLC’s organizational documents or LLC operating agreement will detail the procedures for removing a member and what happens with the ownership interests. If not, the state’s laws establish if and how members can be removed.

It’s helpful for business owners to consult an attorney when creating their operating agreement. It is the governing contract adopted by an LLC’s members to regulate how to manage the company, share profits, and handle other aspects of the business’s affairs. Likewise, it’s wise to seek professional legal guidance when removing an LLC member to ensure no steps are missed and help reduce the chances of a stalemate between members (potentially resulting in the court dissolving the LLC).

Common Reasons for Member Removal

Involuntary Member Removal

Legal action by a Limited Liability Company to expel a member from the entity is known as “involuntary dissociation.” Several valid reasons for pursuing involuntary dissociation include:

• The member has breached the LLC operating agreement repeatedly
• The member has engaged in wrongful conduct that will or has harmed the company, or
• The other members have deemed it not reasonably practical for the LLC to continue with the member (e.g., if a member is constantly at odds with other members and the friction affects company operations)

Voluntary Member Removal

An LLC owner might decide to withdraw of their own accord (voluntary dissociation). For example:

• They may wish to retire,
• They may resign because of conflicts with other members
• They may leave the LLC for personal reasons (for example, health or family issues)

What Happens to the Member’s Economic Interest in the Company?

If dissociated, whether voluntarily or involuntarily, a member’s equity interest in the LLC might not automatically terminate. For example, in states that have adopted the Revised Uniform Limited Liability Company Act provisions, unless a court orders otherwise, a dissociated member does not retain management rights in the LLC but maintains a financial interest in the company and receives distributions. That’s why it’s critical for an LLC’s operating agreement to lay out what happens when an owner is expelled or withdraws from the company.

Below I’ve listed some of the possible ways a member’s ownership interests might be handled. Which must occur depends on the circumstances, whether the LLC has an operating agreement (or articles of organization) that addresses those situations, and the state’s laws. If an LLC operating agreement does not detail what should happen, statutory rules will prevail unless a court decides otherwise.

Possible Outcomes:

• The member will continue to hold their equity and receives distributions.
• The remaining members will buy out the member’s interests.
• A resigning member will receive no compensation upon withdrawal.
• The member’s interests will transfer to someone else.
• The member can sell their interests in the company (typically giving remaining members first right of refusal before offering them to someone outside of the LLC).
• The remaining members equally distribute the removed member’s interests among them.

A word of caution: In a buyout situation where the remaining members purchase the dissociated member’s ownership interest in the LLC, things can get tricky. When determining the monetary worth of a member’s ownership, more than just the member’s initial investment in the company may come into play (e.g., time spent working in the company, property or equipment invested in the company, the professional expertise the member brought to the organization, etc.). For example, LLC members might have agreed that a member who only invested 25 percent in the company is entitled to 40 percent of the profits because of their specialized industry knowledge that helped grow the business. Upon a member’s withdrawal or expulsion, the LLC may benefit by bringing in a third party to do a valuation – i.e., evaluate the situation and assess the value that the member (or heirs) is entitled to.

Three Scenarios for Removing a Member

Because a limited liability company is considered a legal entity separate from its owners, usually it can remain intact after a member of a multi-member LLC leaves, dies, becomes incapacitated, or is involuntarily dissociated.

First and foremost, LLC members must check their company’s operating agreement and articles of organization. If those documents do not include provisions for handling the situation at hand, then the LLC must follow the state’s default procedures.

Scenario 1: When the LLC Wants to Expel a Member

An LLC’s articles of organization, filed with the state when forming the LLC, might include provisions for a member’s involuntary withdrawal (usually, via an attachment to the state’s form). Or the LLC’s operating agreement might detail those provisions. When either of these documents contains procedures for voting out a member or forcing a member to withdraw, the LLC must follow those steps.

If an LLC’s governance documents do not contain express language about removing members, the company must follow the state’s procedures. Those rules vary from state to state. Some state statutes do not have provisions for expelling members, and the entity may have to be dissolved (closed). Twenty-one states and the District of Columbia have LLC laws based on the Revised Uniform Limited Liability Company Act (RULLCA), which typically does not allow members to vote out other members. However, in those jurisdictions, the LLC may ask the court to order the expulsion of an LLC member if the circumstances involve wrongful conduct, breach of contract, or a situation in which it’s not reasonably practical to have the individual as a member.

Regardless of the procedure that the LLC must follow, members must pay attention to every detail!

Scenario 2: When a Member Withdraws

An LLC’s operating agreement or articles of organization should set forth specific provisions for handling matters if a member withdraws or resigns from the company. An operating agreement might state that if a member wishes to withdraw, they must submit “notice of the person’s express will,” which is usually a written notice of resignation. Or the required notice might take another form, such as members’ approval of amending the LLC’s articles of organization (or certificate of organization). Some LLC operating agreements do not allow members to withdraw and require dissolution if a member leaves. If no operating agreement is in place or doesn’t include provisions for when a member leaves, then an LLC must follow its state’s laws. Some states require the LLC’s dissolution when a member leaves and no formal succession plan was documented.

Scenario 3: When a Member Dies

Ideally, an LLC operating agreement will explain what must happen when a member passes away.

Several possible provisions an operating agreement might include are:

• Surviving LLC members must buy the deceased member’s ownership share from the departed heirs.
• The deceased’s heirs may inherit only the financial interests (i.e., profits, losses, assets) but not management rights in the business.
• The LLC must dissolve if a member dies, and that deceased member’s share of the LLC’s assets must be distributed to the departed’s heirs.

Because different alternatives can have significantly diverse effects on the company, remaining members, and the beneficiaries of the deceased member, it’s essential for operating agreements to include detailed procedures.

If an LLC’s operating agreement doesn’t include what should happen when a member dies, remaining members must follow their state’s law. Some states require that an LLC dissolve and start a new LLC if a member dies (although that’s more so with single LLCs rather than multi-member LLCs). Other states require that a deceased member’s financial interests (and sometimes management interests) go to the beneficiaries in the individual’s will. Some states may have other rules in place for handling the death of an LLC member.

Business Entity Compliance After Removal of an LLC Member

An LLC must notify the state about any changes to its ownership and update any other business records that identify the LLC members, their ownership interests, roles, and responsibilities.

• Filing Articles of Amendment to update the LLC’s initially filed Articles of Organization
• Update the LLC operating agreement (Although this does not get filed with the state, the operating agreement must reflect the current ownership rights, responsibilities, procedures, etc.)

As you can see, many factors affect how to remove an LLC member and what happens to that member’s ownership interests upon removal or withdrawal. An attorney can serve as a valuable resource in navigating the procedures and ensuring the process gets appropriately handled.

CorpNet is here to help you complete all your required compliance filings accurately and on time. Whether you’re starting a new LLC, need to file articles of amendment, or must file articles of dissolution, we have the expertise and experience (in all 50 states!) to help you as you work through the process. Contact us today to get started!

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What is a Partnership?

A partnership is a legal entity where two (or more) people own and operate a business, and each partner owns a percentage of the assets and liabilities of the company. The critical difference is that the partnership agreement details the partners’ ownership and responsibilities. Although a partnership agreement is not legally required, it is highly recommended for both the partnerships’ success and an amicable termination, if necessary.

What’s in a Partnership Agreement?

For a general partnership, the partnership agreement should contain the following:

• Business Name. Unlike a sole proprietorship which is usually named after the sole owner, a partnership should have an official business name that should be used on all bank accounts and documents.
• Contributions. The partners are not required to make equal financial contributions to the business—their financial obligations can vary. The agreement should contain any past, current, and future financial stakes.
• Distributions. How the company plans to distribute partner profits should also be documented. If there is no documentation for allocations, the Internal Revenue Service (IRS) considers each partner equal.
• Ownership. Here, the agreement should outline what happens if:
  • The business is sold
  • One or more of the partners wants out
  • The partnership takes on new partners
  • One of the partners is bought out
• Decision-making. Which partner has daily management decision-making power? What about group decisions? Or financial decisions?
• Disputes. In this section, the agreement documents how to handle conflicts. The goal is to keep arguments from turning into costly court cases.
• Critical Developments. This part lays out how to amend or terminate the agreement when/if a partner dies or wants to retire.

Once the partnership agreement is drawn up, it’s a good idea to have an attorney look it over to clear up any confusing language and make sure nothing is missing.

What Is Considered a Partnership Termination?

Legally a partnership continues to exist until it is terminated. What causes a partnership to end? As mentioned above, there could be numerous reasons to terminate a partnership, including personality conflicts or irreconcilable differences. However, it can also be something less dramatic, such as the partners want to change the business’s legal structure. A partnership is considered terminated if no part of its business, financial operations, or activities continues.

In any case, the partnership agreement dictates what happens when the partnership is terminated. Without an agreement, the termination terms are left up to the courts in your state. In the event of a partner’s death, the agreement could require the partnership to terminate immediately and have the deceased partner’s assets be reassigned to the remaining partner(s). Or there may be a succession plan in place for the deceased partner’s family to have a stake in the business. In that scenario, the partnership is still intact because the beneficiaries are part of the business. Likewise, if one partner wants out and sells his portion to the remaining partners, the partnership still exists.

A partnership termination is necessary when the company is reduced to one owner, ceases to do business, or changes legal structure. For example, if the latter is the case:

• From a partnership to a sole proprietorship: The steps to transfer ownership of the business from partners to a sole proprietorship should be documented in the partnership agreement. In many cases, this means one partner is buying out the others partners, and the assets and liabilities of the company will be redistributed to the remaining owner. However, without an agreement, the assets and liabilities typically are divided equally among the original partners, who then need to create documents about each aspect of the business, including company name, customer lists, etc., and how they will be distributed.
• From a partnership to a Limited Liability Company (LLC): There are several reasons a partnership may decide to restructure as an LLC. Whether there’s been a change in ownership or just a desire to change the company’s business structure, the partners need to follow the compliance rules for LLCs in their home state. This usually entails searching and filing for a legal business name, filing an LLC application with the Secretary of State, and filing an operating agreement and articles of organization. The new LLC must also obtain a Federal Tax ID number from the IRS.
• From a partnership to a C Corporation: Likewise, if the partnership decides to restructure as a C Corporation, the remaining partner/s must follow the compliance rules for incorporating in their home state. This entails searching and filing for a legal business name, filing to incorporate with the Secretary of State, and creating a board of directors, creating and filing bylaws and articles of incorporation. The new corporation must also obtain a Federal Tax ID number from the IRS.

Once the partnership votes to restructure and files for the new structure, all assets and liabilities should be transferred to the new structure. After the transfer occurs, the partners can begin the dissolution of a partnership and terminate the partnership agreement.

Difference Between Dissolution and Termination of a Partnership

In basic terms, the dissolution of a partnership refers to the steps involved in winding up the business, preparing for termination. Termination is the final result; the company has ceased all business activity and no longer exists.

How to dissolve a partnership? Generally, the steps include paying off or settling all the company’s debts, liabilities, and obligations. If all debts cannot be paid, the creditors must be notified of the dissolution so they can try and recoup some monies in court.

Once the partnership has started the dissolution process, the company can no longer conduct any business activity. A partner can dissolve a partnership if he or she withdraws from the partnership or if the partner dies.

If the partnership is registered to do business in other states, the partners must follow that state’s rules for dissolution and termination.

Tax Consequences

Any change in a business structure can result in tax consequences. Partnership termination tax consequences depend on what happens after the partnership ceases or restructures. Partnerships are considered non-tax-paying entities. The partnership itself does not pay income tax. The partners are not employees, and the partnership passes both profits and losses through to the partners.

When the partnership terminates, partners must pay taxes on any remaining profits and the liquidation of current and fixed assets. If the partners are not equal, per the agreement, then the distribution of remaining assets and losses will also not be equal. If the partnership restructures, then the assets and liabilities of the partnership can become part of the new entity, and the tax consequences depend on how the new company chooses to be taxed.

CorpNet Can Help

Because the path to partnership termination is fraught with many hurdles and challenges to overcome, we highly recommend you consult with an attorney and accountant so the process goes smoothly. Then, enlist the help of my team at CorpNet to assist with all your articles of dissolution and documentation needs.

The post The Right Way to Terminate a Partnership Agreement appeared first on CorpNet.

Let’s dig into some of the details involved with the dissolution of a Corporation or LLC. The information I will share here is for informational purposes only—for legal, tax, or financial advice, consult certified professionals in those disciplines.

Top Questions for Business Owners

How Do I Legally Dissolve a Corporation or LLC?

To file for dissolution in a state, business owners must file Articles of Dissolution (also called “Certificate of Dissolution) with the Secretary of State office or comparable state agency. Filing Articles of Dissolution will allow you to end your business entity permanently. Before a state dissolves a company, the business must file all outstanding state fees, reports, and taxes.

It’s crucial to make sure Articles of Dissolution are completed accurately so that the business may close without delays or issues.

Do I Need to Close My Business Before Year-End?

Deciding if you should close a business leads to the question of when should you dissolve a corporation or your LLC. The ideal time can vary depending on the situation. Closing before the end of the year offers the advantage of avoiding fees and tax obligations for conducting business in the new year.

For that reason, many business owners try to wrap up dissolution tasks by year-end.

Does this Process Vary by LLC or Corporation?

The process for dissolving an LLC and Corporation are slightly different.

Before filing Articles of Dissolution, here’s what LLCs and Corporations must usually do:

• Typically, an LLC must hold a meeting with its owners (known as members and have them vote on closing the company. The record of the final vote must be captured in the meeting minutes.
• In most states, if a Corporation issued shares of stock to shareholders, it needs ⅔ of the voting shares to agree on the dissolution. Generally, if the company did not issue shares, then the corporation must hold a meeting with its Board of Directors and ask them to vote on closing the company. In either case, the record of the final vote must be captured in the meeting minutes.

Does the Process Vary by State?

Yes, it does. It’s critical to check with the appropriate state agency (usually the Secretary of State office) to determine the requirements for dissolving an LLC or Corporation in the state(s) where the business is registered.

What if My Business is a Partnership?

In the case of a partnership, business owners must inform the IRS that their partnership is dissolving. When submitting Form 1065 (U.S. Partnership Return of Income), they must check off the box that says it is the final return. They should complete the form by the 15th day of the third month after the tax year ends.

What Happens to My Existing Customers and Contracts?

Great question! Before you dissolve a corporation or LLC, it’s important for a business to collect any outstanding accounts receivables and to notify customers that the company will be dissolving. If any contractual obligations remain, a business owner must deal with those. This may require the assistance of an attorney to ensure no loose ends get missed in the process.

Do I Need to Notify Creditors?

Yes, it’s important to alert creditors, vendors, and other individuals and entities to whom the company owes money. That will allow those parties to identify any outstanding debt the company owes them and ensure it’s resolved before the business closes.

Can I Dissolve a Business With Debt?

When a business has outstanding debts that it cannot pay, the company may be liquidated or close under administrative dissolution by the state. With liquidation, the company sells its assets to pay off debts before it closes. Partners, members, or directors, must approve the liquidation, establish a plan, and notify creditors. The guidance of both an accountant and an attorney can help ensure a smooth process. Whereas liquidation is voluntary dissolution, administrative dissolution usually occurs involuntarily when the state dissolves a business after numerous failed attempts to get the business owners to settle their deficiencies.

What Happens to My Business Debts?

If a business cannot pay off its debts before closing, outstanding financial obligations become uncollectable debt for the creditors that are owed money. If business owners have personally guaranteed business loans or debt, they may find themselves sued by creditors, thus exposing their personal assets for repayment of the business’s debts.

What Happens to My Employee Identification Number (EIN)?

The IRS requests that business owners send a letter to close their IRS business account. It should include:

• The complete legal name of the entity,
• The EIN,
• The business address,
• And the reason for closing the account with the IRS.

If possible, they should also include a copy of the EIN Assignment Notice that the IRS issued when assigning the EIN.

Any outstanding taxes or tax returns due must be filed before the IRS will close an account.

Is there a Checklist I Can Follow?

As I shared earlier, the process to accomplish the dissolution of a Corporation or LLC varies from one state to the next and by business entity type. Below is a handy checklist of the typical steps involved when dissolving a business:

1. Dissolve the business structure – Hold the necessary meetings and votes to obtain approval; record the results of those votes in meeting minutes.
2. File Articles of Dissolution – Let CorpNet help you by preparing and submitting the form.
3. Collect any outstanding accounts receivables – Collect money owed to the business from customers. If this might be difficult or too time-consuming, you may want to explore selling your accounts receivable to a factor.
4. Sell the company’s assets – Selling assets and inventory can help business owners generate more cash before they close their doors. Besides holding a sale at your location, Craigslist may be a viable option for selling office equipment, furniture, and supplies. Another way to sell assets is by holding an auction to attract other business owners.
5. Pay off outstanding business debts –  Plan to settle outstanding accounts payables with your vendors, suppliers, and creditors. If you can’t pay everything, talk with your attorney about your options.
6. File final payroll taxes – Businesses with employees must submit their payroll forms and pay payroll taxes after they’ve paid their employees for the last time. Talk with your attorney and accountant about filing Form 656 with the IRS to make an Offer in Compromise if you’re unable to pay your payroll taxes in full. Another option that may be worth exploring is setting up a payment installment plan by filing IRS Form 433-A.
7. Pay final state sales tax obligations – If your company collects sales tax on the products and services you sell, submit the final state sales tax forms. Then, ask your state tax agency what you must do to close your sales tax account.
8. File final income tax returns – There’s usually a “final return” box that needs to be checked off by LLCs and Corporations that are closing and making a final return. A tax professional can help ensure that final returns are completed correctly. Another form that applies to some businesses is Schedule K-1, for reporting shareholder allocations (and losses) for partners.
9. Cancel business licenses and permits – All licenses and permits issued by federal, state, county, and local agencies should be canceled. Otherwise, the business may still be on the hook to pay them.
10. Distribute cash and assets to business owners – After all debts, taxes, payroll, loans, and fees are paid, a business will usually have the green light to distribute remaining money and property to the business owners. LLC owners typically get distributions proportional to their share in the business. Corporations allocate assets among their shareholders based on the number of shares that they own.

Additional Year-End Tip for Accountants, Advisors, and Business Consultants

Those of you who help entrepreneurs with the legal or financial aspects of their companies may have some clients that can benefit from a business compliance checkup before this year wraps up. Below are some ideas for how you might assist them.

Help Your Clients Prevent Tax Filing Fees and Penalties

Are your clients behind on filing returns or in paying any of their tax obligations for the year? Now is a good time to take stock of where they stand. If they’ve fallen behind, they must understand the sooner they catch up and become current, the fewer fees and penalties they’ll face.

Validate Your Clients Are in Good Standing

When your client is in good standing in a state, it means that their business is legally registered with the state and authorized to conduct business there. “Good standing” requires following the state’s rules for conducting business in its jurisdiction (e.g., paying taxes, filing the necessary reports and other documents, obtaining the required licenses and permits, and possibly fulfilling other requirements). A state’s business filing agency (typically the Secretary of State office) can confirm or deny if a business entity is in good standing. If your client is thinking of applying for a loan or applying for (or renewing) licenses and permits, they may need to request a “Letter of Good Standing” from the state.

Validate Your Clients Have Completed Their Annual Compliance Filings With the State

The annual business compliance filings a client must submit and pay for depend on the state and the business structure. Some common examples of annual compliance filings include:

• Annual report or biennial statement
• Annual meeting minutes
• Franchise tax
• Articles of Amendment (in the event of major changes to the company, such as an address, name, membership, new shares)

CorpNet’s free Compliance Portal can help your clients stay on top of what filings must be completed when.

Help Clients Formally Perform Name Changes with the State

If a client wants to change the business name before the end of the year, the process and amount of time it takes to accomplish it will depend on the state and the business entity type. I’ve recently written an article with details about what’s involved in making a business name change.

Validate Your Clients Have the Proper Business Licenses and Permits in Place

Some licenses and permits expire, so it’s critical to make sure clients have renewed—or plan to renew— whatever is required in their state. Operating without the proper licenses and permits is illegal. Check with the appropriate state, county, and local agencies or consider CorpNet’s Business License Service Packages to identify what clients need.

Convert Clients to the Correct Business Entity

Before the year ends is an ideal time to consider if the business structure a client has chosen is still the ideal option. A business’s situation can change as it grows and evolves. For tax or liability reasons, converting to a different entity type may prove advantageous. It’s wise for your client to seek professional tax, accounting, and legal insight before deciding on a business entity change. After your clients have the expert advice they need to make an informed decision, CorpNet can help with filing the business entity conversion.

Help Clients Get Reinstated for Noncompliance or Prior Dissolution

If you have a client whose company has been placed in Non-Compliant status or administratively dissolved by the state, CorpNet can assist with reinstating them. “Reinstatement” is a legal filing to officially bring an LLC or Corporation back into good standing and in active compliant status.

Enroll in the CorpNet Partner Program to Help Your Clients and Open a New Revenue Stream for Your Business

The CorpNet Partner Program is cost-free to participate in, and it allows you to generate additional revenue for your company. You have two options, each providing a unique way to boost your income potential:

Become a CorpNet Reseller
Offer our business formation and compliance services to your clients under your brand. You get wholesale pricing and then sell our services to your clients at retail rates. We do all the work as your silent fulfillment partner.

Become a Referral Partner
Refer your clients to us for their business startup and compliance needs. You send us the business, and we send you a commission check.

Final Remarks on Closing Corporations or LLC’s

Whether you’re a business owner closing a Corporation or LLC (or a professional in an advisory role helping entrepreneurs navigate changes), having the right resources by your side makes everything easier. At CorpNet, my team of filing experts will make sure your dissolution forms get completed accurately and on time.

Contact us today!

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