What can your business-owning clients do when they are tired, there's limited revenue coming in and can’t (or simply don’t want to) sell or pass it on and just want to retire?
If your business clients sound like they fit any of the above scenarios, you can advise on three unique paths they can take to ultimately wind down their business.
10 Steps to Retirement
As their accountant, you should intuitively know what your small business clients must do. Intuit actually sums it up quite nicely in their 10 Step Checklist for Closing a Business. Here’s what your business owner clients should know:
1. Get people who owe you to pay you. You have accounts receivable, so chase after them or sell them to a factoring company that will pay you something, then collect on their own. As an FYI, if the owner of a small business dies, the people owing him money often lie low, hoping the outstanding bill will be forgotten.
2. Tell your customers. You might run an ad or place an announcement in the paper. This might precede a “going out of business sale.” Getting the word out is important if you have outstanding contracts you are midway in fulfilling. You need to get the job done or negotiate your way out of it. Contracts may have cancellation provisions. Someone is depending on you and you don’t want to be sued.
3. Sell everything. You are running that big sale mentioned above. You are selling furniture, fixtures and office supplies too.
4. Tell your creditors. You owe suppliers money. You have bank loans and business credit cards. You’ve got a phone, electric and other utilities. You want final bills that you can settle up. If you’ve got automatic debits for expenses like health insurance, these need to be stopped.
5. Tell your employees. If you are a sole proprietor, it’s not a big issue. If you have full or part time people working alongside you, you probably told them during step one. However, there are lots of labor laws dictating the formal process. You want to do right by your people. Pay them, including any expense reimbursements they’ve submitted.
6. Pay those payroll taxes. You’ve paid your employees, but you still ow the Federal and State taxes. Make those payments.
7. Pay the sales taxes you’ve collected. You’ve been doing this regularly, but now you need to let the state know you are closing your business.
8. File your final tax return for the business. Business owners need accountants because the business is an entity unto itself, even if you are winding it down.
9. File employer tax returns. It might be just you, you had employees or brought in independent contractors. This needs to be filed. When the previous four steps involve paying taxes, you can see a theme here.
10. Distribution to owners. Hopefully, after paying bills, there’s something left for your (former) business owning client to put in the bank.
What Does the Small Business Administration Say?
The SBA also has guidelines for winding down a business. These are spelled out in “Close or Sell Your Business.” We’ll focus on the steps for closing a business.
1. Decide to close. If you are the sole proprietor, you make that call. If you have partners, your articles of organization provide a roadmap. This decision is done in written form.
2. File documents with the state for dissolution. Why? If you don’t, they may still hold you to filing requirements and be looking for taxes.
3. Cancel licenses, registrations, permits and the business name. You are officially establishing you are no longer doing what you were doing.
4. Follow labor and employment laws and regulations. The Worker Adjustment Retraining Notification Act of 1988 sets rules and procedures that must be followed for employee notification.
5. Pay bills and taxes. You also want to cancel your Employer Identification Number. (EIN)
6. Maintain records. You may have closed your business, but most records need to be kept for three to seven years.
What Does the IRS Say?
The IRS has its own list of steps to take when winding down a business. In their “Closing Your Business Checklist” there is a 14-step list and links to 20 forms your clients may need to file. These steps are:
- Make final Federal tax deposits.
- File final quarterly or annual employee tax form.
- Issue final wage and withholding information to employees.
- Report information from W-s’s issued.
- File final tip income and allocated tips information return.
- Report capital gains or losses.
- Report partner’s/shareholder’s shares.
- File final employee pension/benefit plan.
- Issue payment information to subcontractors.
- Report information from 1099’s issued.
- Report corporate dissolution or liquidation.
- Consider allowing S corporation election to terminate.
- Report business asset sales.
- Report the sale or exchange of property used in your trade or business.
These were only three perspectives on how your clients can close their businesses, ultimately you are best positioned to guide them through the process and advise on what makes the most sense.