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 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 8 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 is 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.
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 considered unsecured. You can liquidate these assets to cover payments to creditors, taxes, and employees, helping to make closing your business a bit smoother. It's always best to liquidate unsecured assets first, as the proceeds can go to paying off creditors and lienholders according to their priority.
3: Liquidate Secured Assets
All the business's secured assets should also be liquidated. Any machinery, equipment, or other assets that have a loan against them should be sold if possible. The proceeds from asset liquidation should then go to any priority lienholders or creditors where possible. This helps ensure that the business is paying off debts in order of priority. The more you can give those priority creditors, the less hassle your business will face from them as you close. If you cannot sell them for more than you owe, ask the lienholder if they will take them back and forgive the difference, 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 where the business tells the state that it is 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. 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 is 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 square up 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
This last step is especially important and often overlooked. Once all of the paperwork has been filed, employees and creditors are paid, and your business is officially dissolved according to both Texas and federal governments, all that's left to do is keep all records of the process.
This is important should you or your business be sued or audited by the IRS as you will need proof of proper dissolution. Make sure you keep copies of:
- Property records
- Employment tax records
- Tax records
- Final bank account statements
- Final Financial Statements
- Back-up of Quickbooks or accounting system
- Statements and records of final payments for leases, equipment, purchases, etc.
- Corporate resolutions or decisions related to closing the business
- Documentation of the business closing process and recorded in your company's Corporate Record Binder.
Once complete, scan the dissolution documents and other records into a cloud storage system such as OneDrive, Google Drive, Dropbox, or other provider. The more complete your documentation and records, the safer you will be should anything occur down the road.
Closing Your Texas Business
Closing a business can feel bittersweet. While it's a lot of tough paperwork and filing, it's important to make sure your Texas business is properly closed to minimize your legal and financial exposure. If you're having trouble closing your business, and especially if you're dealing with predatory lenders, get in touch with The Lane Law Firm.
