Q: Should the business bank account be closed before or after the dissolution of the business is approved by the state?
Thank you to a client from Serbia for that great question! You’ll need to close all your business bank accounts, settle your business debts, and distribute any remaining money or assets after you dissolve your business. Dissolving an LLC or corporation is only the first step in closing your business. We break down the steps you need to take to close out all your business financial accounts.
Learn how to dissolve your business.
1. Settle your business debts after dissolution.
By law, you need to inform any creditors or lenders of your company’s dissolution. This could include equipment lenders, credit card companies, and loans your company took out. Review your creditor and lender contract for terms of how to handle closing out accounts to avoid defaulting on any loans. In most cases, you’ll have to pay back your debts in full or negotiate to pay a percentage. You’ll also want to collect any loans your business may have made.
2. Pay taxes.
You are required to file federal taxes and any applicable local, employee, or state taxes at the end of the year after you dissolve your business. Sole proprietors, pay taxes using their personal tax return and you’ll file Schedule C Form 1040 or Form 1040-SR with the IRS. LLCs with default tax status, partnerships, and businesses with S-corp status will also pay their final business taxes on their personal income tax return. However, partnerships will also file Form 1065, and S-corporations file Form 1120-S. C-corporations pay corporate federal and state income tax and file Form 1120.
Check out the IRS Guide to Closing a Business for more tax information and forms.
Paying final employee taxes and wages.
If your business had employees or independent contractors, you’ll need to pay them their final wages and any compensation owed. You’ll also need to make any final tax withholding with the federal government, including Social Security and Medicare taxes. The forms you may need to file with the IRS include:
- Employer’s Quarterly Federal Tax Return
- Employer’s Annual Federal Tax Return
- Employer’s Annual Federal Unemployment Tax Return
- Wage and Tax Statement
- Transmittal of Income and Tax Statements
- Employer’s Annual Information Return of Tip Income and Allocated Tips
- Nonemployee Compensation
Most states require employers to pay the final paycheck to employees within a certain window of time. For example, in California, employers must make final payments to discharged employees immediately, according to CA Labor Code § 201 (2021). You’ll also want to terminate and distribute any funds from retirement and health plans.
Learn more about hiring employees as an LLC.
3. Liquidate your company’s assets.
Liquidation refers to selling your company’s non-cash assets like properties, equipment, furniture. You’ll need to notify your landlord or realtor if your business has an office, storage unit, or other physical property that you are no longer using and pay any penalties for breaking your lease. For any physical assets your company owns, like cars, computers, office furniture, etc., you may choose to sell or auction off these items and report the income as gains on your tax returns.
Any tangible assets you pledged as collateral cannot be liquidated and must be returned to the leaser or moved to another person who signs your lease in your place. You’ll need to check with your leaser on what steps are accepted for closing any leased assets.
4. Distribute final funds to owners.
Once you’ve settled your debts and liquidated your assets, it’s time to distribute any remaining funds. If you’re a sole proprietor or single-member LLC, all final funds will go to you. If you have multiple owners for your business, you’ll need to distribute the remaining funds of the business to each member or stakeholder. For corporations, shareholders are paid based on their ownership percentages. LLCs pay distributions based on the capital contribution members originally paid. All other excess funds are then divided among members who made contributions. Your operating agreement and bylaws will outline the full process of distributions after dissolution.
Learn more about LLC Operating Agreements and Corporate Bylaws.
What are capital contributions for an LLC?
“Capital” stands for cash or assets, and an LLC’s capital contributions are the contributions made by a member to an LLC.
5. Close your business bank accounts.
The final step in winding down your business is closing your business bank accounts. You may choose to hold off on this final stage for several months, so you still have an account to pay any fees, bills, or taxes that may come up. While you are allowed to use your business bank account for settling affairs, you may not use it to enter into new business. You’ll want to ensure all outstanding checks have cleared and any funds in the account are distributed before closing the account.