Learning Center

The Tax Consequences of Closing Your Small Business

The possibility of a recession looms large. According to one recent study, approximately 20% of all small businesses that open their doors today will close within the first year. Of the number that survives, about 30% will close just one year later. By year five, about half of those SMBs will have closed.

All of this is to say that if you've tried to open a small business and have had to prematurely close your doors for whatever reason (be it the condition of the larger economy or other concerns), you're not alone. Still, just because you're about to close your doors doesn't mean your obligations as an entrepreneur are formally over.

Case in point: income taxes. Just as was true with starting a business, closing a small business brings with it some essential tax implications that you need to be aware of in the coming year. This is true both for yourself and with regard to the hardworking men and women that you employed along the way.

The Implications of Closing a Small Business: What You Need to Know

Overall, the most important thing to understand about this process is that the tax consequences of closing a small business depend largely on exactly what type of organization you're talking about.

If your small business was a C-Corp, for example, you will likely be subject to what is called "double taxation." This means that not only will you be paying taxes on any assets that get distributed to shareholders, but those shareholders will also be taxed on gains on their individual incomes as well.

The situation is a bit different if you're talking about an S-Corp, which is more of a "pass-through" entity when it comes to income tax purposes. This means that any profits or losses will get reported on the tax returns of each shareholder. However, these rules don't apply to any "liquidating distributions" that are made.

Essential Information About Closing an LLC

In a situation where the business that you're closing is an LLC, things will also operate a bit differently. Here, you're also talking about a company that dealt with "pass-through" income to its shareholders. This was true whether you formed the business as a sole proprietorship or as partnership income. The way taxes are handled will largely continue through until you formally dissolve the business. This means that every member of the LLC will be exclusively responsible for reporting their own income, which includes any share they receive of the company assets that are distributed upon its closing.

Don't Neglect Your Employees

Regardless of the type of business that you're closing, one of the most critical obligations that you have will come down to your employees. In no uncertain terms, you need to not only pay them any final wages that they are owed, but you also need to make employment tax payments, too. If you don't, you could be subject to a significant penalty that, since you are already in the process of closing your business, it would be in your own best interest to avoid.

In addition to paying all the taxes that you still owe (which your small business accounting professional should be able to help you take care of), you'll also need to report any payments that you've made to contract workers along the way. Don't forget that if you have paid independent contractors at least $600 for their services throughout the course of the year, you need to report those payments to the Internal Revenue Service.

Finalizing the Closing Process

Finally, you'll want to cancel your employer identification number (EIN) and close your business account with the IRS. To do this, you need to send a letter that includes several important pieces of information, including the complete legal name of the business that you're closing, its address, the business EIN that you've been using up to this point for tax purposes, and the reason why you are now in the process of closing the account. Obviously, the reason will come back to the fact that you're shutting down the business in general, but this all still needs to happen by way of a formal process so that there are no issues in the future.

In the end, closing a small business is certainly an unfortunate situation to find yourself in - but it's critical to understand that this is one journey you do not have to make alone. Countless people find themselves in a similar situation on a daily basis and so long as you take the lessons that you've learned along the way with you, there is truly no limit to what you may accomplish moving forward.

If you have any additional questions about the tax consequences of closing your small business, or if you'd just like to speak to someone about your own situation in a bit more detail, please don't delay - contact us today to speak with an accounting professional directly.

Share this article...

NEVER MISS A STORY.

Sign up for our newsletters and get our articles delivered right to your inbox.

I confirm this is a service inquiry and not an advertising message or solicitation. By clicking “Submit”, I acknowledge and agree to the creation of an account and to the and .

Social Media

Rose Tax & Financial

8 Pinon Ave
Cedar Crest, New Mexico 87008
Mon - Fri: 10:00am to 6:00pm
Sat: 10:00am to 2:00pm

Check the background of your financial professional on FINRA's BrokerCheck
Avantax affiliated Financial Professionals may only conduct business with residents of the states for which they are properly registered. Please note that not all of the investments and services mentioned are available in every state. Securities offered through Avantax Investment Services℠, Member FINRA, SIPC, Investment Advisory services offered through Avantax Advisory ServicesSM, Insurance services offered through an Avantax affiliated insurance agency. 3200 Olympus Blvd., Suite 100, Dallas, TX 75019. 972-870-6000.
The Avantax family of companies exclusively provide financial products and services through its financial representatives. Although Avantax Wealth Management® does not provide or supervise tax or accounting services, Avantax representatives may offer these services through their independent outside business. Content, links, and some material within this website may have been created by a third party for use by an Avantax affiliated representative. This content is for educational and informational purposes only and does not represent the views and opinions of Avantax Wealth Management® or its subsidiaries. Avantax Wealth Management® is not responsible for and does not control, adopt, or endorse any content contained on any third party website.
This information is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.
The information being provided is strictly as a courtesy. When you link to any of the web sites provided here, you are leaving this web site. We make no representation as to the completeness or accuracy of information provided at these web sites. Nor is the company liable for any direct or indirect technical or system issues or any consequences.
For Important Information and Form CRS please visit https://www.avantax.com/disclosures.

FAQs Frequently Asked Questions
Type your message here.
Please fill out the form and our team will get back to you shortly The form was sent successfully