How to Dissolve a Business:
Step-by-Step Guide for Small Business Owners

Sell to 3rd Party / Sell To Employees / Asset Sale / Succession Plan / Dissolution

Free Assessment

It's 100% free to get started.


If the time has come to close your small business, it is important to understand it is more than selling off some assets and locking the door one final time. Notifying the relevant entities such as the Internal Revenue Service as well as state and local entities is a key piece to winding down or closing a business. Dissolution is a process that requires planning and ensuring you take the right steps to avoid potential tax penalties or other issues.

So what does it mean to dissolve your business? What resources should you engage in this process? And when is the right time to go through dissolution? We’ve compiled everything you need to know.

“Dissolution is a fundamental change transaction because, absent intervening actions or occurrences, it triggers the windup of a firm that results in its termination.”
— The American Bar Association

When the Time is Right to Close Your Business

There a number of reasons why it might be time to dissolve your business. Perhaps you’ve been thinking about closing for quite some time and now your personal circumstances allow you the opportunity to retire. Maybe your business was hit hard by the COVID-19 pandemic and despite often heroic efforts, the business is not sustainable. Perhaps market trends have been moving in another direction, and your industry is contracting instead of expanding. Many small business owners even face the reality that their adult children have decided to follow a different path than taking over the family business.

The Bottom Line: If the decision has been made to discontinue, it’s time for dissolution.

Get guidance for your dissolution.

It’s free to get started. ExitGuide helps you from start to finish.

Free Assessment

What Does Dissolution Mean?

Legally, to dissolve a company is to cease all operations and officially close the business with government agencies. It’s a fairly straightforward process to dissolve a company involving some paperwork and perhaps a meeting with members or shareholders if the structure of your company requires. Following the proper steps to dissolve a company will prevent ongoing governing state agency fees and income taxes, even after operations cease.

It is important to note that dissolution is not the same as bankruptcy, if you believe your business may be facing bankruptcy you will want to learn more about what bankruptcy entails and seek professional advice from an attorney. The bankruptcy process goes through the federal court system and allows the business to eliminate or repay debts under the court system.

Step 1: File Articles of Dissolution

When you (or the previous owner) started the business, they filed Articles of Incorporation with the state, and this marks the date your business officially became a legal business entity. Until the state is notified otherwise, the entity will remain in existence and can be responsible for obligations and liabilities.

To notify the state, you’ll fill out what’s known as a “Certificate of Dissolution” and file it with the Secretary of State where the business is operating. The submission will require you to have information including your business name, Employee Identification Number (EIN), type of entity, names of any board of directors or major shareholders and funds to pay associated filing fees.

Submitting the filing is only the first step. The submission must be approved, and in order to do that, you must ensure all fees, penalties and costs related to the state are paid in full. Any unpaid liabilities will delay the process as you work to pay them in full or work with the state on a solution. The longer you wait, the more penalties you may incur so it is essential to address any fees — even if it is difficult.

Once the application has been approved, there is yet another step! The commission that approved the dissolution must receive a notice from the department of revenue that all taxes and any levies or fines have been paid.

Using a registered agent is a good idea if you can afford it and will ensure you follow the right steps. It can also save you money in the end, not to mention the headache of going through this process while experiencing the emotional impact of closing a business.

Step 2: File Tax Paperwork

It may be no surprise that you must file a final federal tax return for the year you have closed and dissolved the business and pay the taxes due. Now, there are different types of returns and related forms based on the type of business: LLC, Sole Proprietorship, General Partnership or a Corporation. It is crucial to file the forms specific to your type of business, since there is not a one-size-fits-all process.

Using A CPA To File Final Returns

If you work with a CPA to file your returns, you will definitely want to enlist their help in this process to ensure you take the necessary steps based on your business type. In most cases, your CPA will know which tax forms are required for your final return and calculate taxes due. Yes, even when you are closing your business for good, you are still required to pay taxes due for the final period you operated the business.

Payroll Taxes, W2s and 1099s

The final filing is for income as well as payroll taxes (if you have one or more employees). Per the IRS, “you must pay them any final wages and compensation owed. You must also make final federal tax deposits and report employment taxes. If you don’t withhold or deposit employee income, Social Security and Medicare taxes, the Trust Fund Recovery Penalty may apply.”

It is also important that you remember to issue W2s for the final year you had employees. If you dissolve your business in June, for example, you are still required to issue W2s for the months they worked for your business. This applies for any contract workers receiving a Form 1099. Getting advice from an attorney on complying with local and state labor laws is a good idea and helps ensure you are compliant.

Step 3: Contact Local Agencies

The Employer Identification Number (EIN) that was assigned to your business when it was formed needs to be cancelled. This lets the IRS know your business is no longer operating and, although the IRS will cancel the EIN, this number is permanently associated to your business so keep track of the EIN well after your business is closed and dissolution is complete in the event you need to request filings or have reference number should the IRS have questions down the road.

Don’t Forget Business Licenses and Permits

As stated above, you will file for the Articles of Dissolution with your state, and that will include finalizing any outstanding tax liabilities with the state. If you have obtained a permit or business licenses necessary for operating your business, you will need to inform the respective agency or entity you want to cancel your permit or registration. Finding the agency that issued the license can sometimes present a problem, if you need help, start with your respective state’s Secretary of State’s Divisions of Corporations Division.

Step 4: Inform Creditors

Dissolving a business means the business is solvent and able to meet its financial obligations starting with final payments to employees. This does not prevent the business from negotiating with vendors to reduce outstanding payments, terminating agreements such as leases to minimize the financial impact of closing. Any loans must be addressed so it is critical you have a plan to pay off all loans and credit card balances. If you need help, you will need contact the bank or entity that is servicing these loans to work out a payment plan.

Does Your Business Take Credit Card Payments?

If your business allows customers to make payments with credit cards, you will want to inform your payment processor (merchant services provider) and send them a letter with instructions to cancel the account. You will likely need to speak with a representative about returning equipment and any other information they require. Here are some tips on what to do if you are not sure how to close your merchant account.

Why You Will Need Your Business Bank Account

Closing your bank checking account should be one of the last items so you can make any final payments or collect any outstanding balances that are on our balance sheet. Be sure to go through your bank account carefully to review recurring expenses and other services that are not necessary in the final stages of running the business. This can save money by eliminating costs as well as potentially avoiding any fees by not providing enough advance notice.

Step 5: Spread the Word to Employees, Customers, and Community

Employees: Be Clear and Help Them With Messaging

In most small businesses, the employees are like family, and communicating news related to a closure can be difficult. To be honest, there is no easy way to communicate bad news if the closure of your business will have negative consequences for employees. There are several articles and studies online, a quick search through these will help you find advice most relevant to your situation. The bottom line is to be prepared.

Be sure to have all your ducks in a row before talking with your employees. Specifically, you need to know how the decision was made, who was consulted, what other possibilities were discussed, and the rationale behind the final outcome.

Harvard Business Review
How To Deliver Bad News To Your Employees

Prepare for Customer Conversations

Reviewing customer agreements to understand your obligations before you contact them will clarify what the business is obligated to do versus what customers will request. Conversations with customers can be challenging, so go into these conversations knowing what you can or cannot provide in order to stay focused on the business obligations and keep things from getting off track.

Once you communicate the news to employees and customers, word will get out in the community. Having a prepared message for you and that employees can use is a smart move, and your employees will feel more comfortable with knowing what to say instead of having to come up with their own message.

Step 6: Sell or Distribute Remaining Assets

In some cases, there is a single buyer for most of the company assets, in this case, you will enter into an Asset Purchase Agreement outlining the terms and conditions along with a schedule listing the items and respective costs. If you do not have a single buyer for the primary assets, liquidating them can help generate some cash for the business that can go toward outstanding liabilities. The process can be as simple as creating a list of the assets you wish to liquidate and an asking price and tracking the actual sale price.

Other businesses and organizations may be thrilled to get a great deal on furniture, office equipment or machinery and you may welcome the cash and having someone remove the items for you. If you have items left, consider donating useful items to a local non-profit, many can use office supplies and other items.

Resources to Help With The Dissolution Process

There are a number of resources online to help guide you through the process including the IRS website business closing checklist. You will also want to search for resources specific to your state as well. Start with the Secretary of State for your state and the Small Business Administration is also another great resource.


Transitioning out of your own business can be confusing and emotional. You have invested a lot into your business and taking steps to exit is not easy, in fact, most owners have never been through the process. You do not have to “figure it out” on your own. ExitGuide helps owners from start to finish by answering basic questions about the process, helping you develop a plan specific to your circumstances and then connecting you with expert resources to guide you to a successful outcome.

Start your free exit assessment

It’s free to get started. ExitGuide helps you from start to finish.

Start My Exit