The smaller and less-complicated nature of a sole proprietorship can, but doesn’t always, make it easier to close down. This is especially true if you close without taking care of outstanding debt, because it will pass through the business and become part of your personal debt. Thus, it pays from a both personal and a financial perspective to understand and follow the necessary steps to close a sole proprietorship correctly.
The U.S. Small Business Administration recommends that you assemble a team of experts and professionals with the expertise to help you work through closing steps. Contact a small-business lawyer, a banker, an accountant and a tax professional as soon as you make a final decision to close. Although sole proprietors typically aren’t required to submit dissolution documents, check with your secretary of state's ofice to make sure you have no legal closing requirements. It’s also a good idea to inform interested parties that you intend to close, including your landlord, service providers, your insurance company, customers and employees.
Contact your local county clerk’s office to cancel the business name if your business name is a “doing business as” assumed or trade name. Cancel all other federal, state and local licenses and permits, such as a liquor license, health department certificate and any sales permits, and notify each agency that your business is closing. Notify and ask vendors, creditors and anyone who owes money to your business to prepare and submit final bills or payments.
Asset and Inventory Reduction
Check state and local laws pertaining to going-out-of-business and liquidation sales, because most states have laws designed to protect customers from false advertising claims and fake going-out-of-business sales Check especially for time limitations, because many states limit inventory reduction sales to a maximum of 60 days. Depending on the state, a sole proprietorship might also need to register with the attorney general’s office and provide a detailed list of sale items.
Settle with Employees, the IRS and Outstanding Creditors
Prepare and issue your final payroll, followed by all applicable tax returns. These include federal and state personal income tax returns, a payroll tax return and a sales tax return. After paying all federal taxes, send a letter to the Internal Revenue Service via postal mail asking to cancel your Employer Identification Number. File copies of all tax records and payment receipts in a secure location for up seven years after closing the business. Work with your lawyer or accountant to prioritize and pay creditors or to file a petition for bankruptcy before closing all bank accounts.