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Why Do I Need to Dissolve My Business?

Dissolving a business requires more than locking the doors and turning off the lights, and it’s important to do it in the right way. Otherwise you might still be on the hook for state and federal taxes, business licensing costs, annual report fees, and more. Just as opening a business requires official coordination with state authorities, so too does closing or dissolving your business.

What Are the Steps to Dissolving My Business? 

  1. Vote to Dissolve: Your company’s formation documents (articles of organization, articles of incorporation, your LLC’s operating agreement, or your corporate bylaws) should indicate internal rules for dissolving the business. If there are multiple owners/shareholders involved, all business associates need to vote on the business closing. If your corporation never issued shares of stock, then your Board of Directors needs to approve the closing of the business. If your corporation did issue shares, you’ll need a 2/3rds vote in agreement of dissolving the corporation. You will also need to record the vote in your corporation or LLC’s meeting minutes. The company must notify each director and shareholder (or members of LLC), whether entitled to vote or not, of the proposed vote. The notice must clearly state that the purpose of the meeting is to consider dissolving the entity.
  1. File Articles of Dissolution: The procedure to dissolve your business varies by state. Some states just ask for a certificate while others require a more complex process. Overall you’ll want to at least have some important information handy so that you can more easily fill out the required paperwork.  You’ll need to submit the document to the state agency in charge of regulating businesses (usually the office of the secretary of state) and pay the state filing fee. Forms and filing fees vary from state. Active Filings has a quick rundown of links for each state’s Secretary of State website here.
  1. Distribute Assets: Once you get approval from the state to dissolve your corporation or LLC, then company assets need to be distributed to shareholders or members. It is important to note that when dissolving your business, the business members or officers are responsible for the liquidation of company assets. Proceeds from the sale are then used to settle any outstanding debts that remain. After all the company debts have been paid, the owners or shareholders of the business can claim and divide the remaining assets. The final step of tying up the financial portion of dissolution is to close all of your business related financial accounts. No sense in getting overdraft bank fees or paying credit card fees if the business is dissolved.
  1. Certificate of Dissolution: The state will issue a Certificate of Dissolution formally closing your business. You’ll have to properly document the certificate by having a company member, officer, director, or another legally authorized party (usually an attorney) sign the Certificate of Dissolution. Once everything is legally documented you’re good to go. If your company has location in other states, those too will automatically be dissolved , however it is important to note that the dissolution of a company must take place in the state where incorporation took place.

What About My Employees? 

If your business has employees, it is important that you notify them as soon as possible. Make arrangements for final payments to your employees. Make sure you comply with state and federal laws regarding these payments, including severance pay and final paychecks. Continue to file payroll tax returns (IRS Form 941) and unemployment tax returns (IRS Form 940), and submit wage reports for employees and independent contractors as required.

Advantages of Proper Dissolution 

Personal and Financial Liability: Even if your business operations have ceased, people associated with your LLC or corporation (members, owners, officers, directors) can still, in some cases, be held liable for certain aspects of the company business unless you properly dissolve the business. Not following all the proper steps to dissolving your business means that you run the risk of incurring significant tax and other penalties, even when you had no income and no tax due. For example, the IRS imposes penalties for both failure to file your taxes and failure to pay your tax bill on time. If your company does not owe any taxes, there will be no fee for filing late no matter what filing status you choose. For those companies that do owe taxes, the failure-to-file penalty is 5% of the unpaid taxes for each month or part of a month that a tax return is late. The total penalty will not exceed 25% of your unpaid taxes. Also, if you didn’t previously set up  a “dissolution agreement” in your company’s organization documents, you could run the risk of a former partner doing something to create personal liability for you, or later file a lawsuit against you claiming you harmed them or the company. You can avoid these issues altogether by following our guideline and making sure you properly and legally dissolve your LLC or corporation.

Taxes and Fees: As long as your business legally exists it is liable for taxes and other fees. The state doesn’t automatically know whether you’ve shut your doors and will be happy to keep levying fees until you officially tell them to stop. Until you file the necessary paperwork, your company will be held liable to file all relevant federal, state, and municipal tax returns. Failure to file these returns can result in the heavy penalties. Dissolving your business the right and legal way saves you money in the long run.

Entity Dissolution Checklist: 


  • File a federal tax return for the year your company goes out of business
  • Make final federal tax deposits
  • Report capital gains or losses
  • Report partner’s/shareholder’s shares
  • File the final employment tax returns
  • File final quarterly or annual employment tax form
  • Issue final wage and withholding information to employees
  • Report information from W-2s
  • File final tip income and allocated tips on company’s information return
  • File final employee pension/benefit plan
  • Issue payment information to any contractors or sub-contractors
  • Report information from any 1099s issued


  • If required, you must file a state tax return for the year it goes out of business.
  • Make final State tax deposits.
  • If you collect Sales Tax in your State, file final Sales Tax Return.
  • If you have employees, you must file the final employment tax returns with your State.
  • File final quarterly or annual employment tax form.