Terminating a business can be a difficult decision, especially if it is a long-standing part of your life. However, maintaining an inactive one can cause financial hardship or legal risk over time. Regardless of the reason behind your decision, closing an inactive company can be a necessary step for moving forward with your life.

Should You Close Your Inactive Business?

Shutting a firm down is never an easy choice, but there are valid reasons some owners decide it is the best path forward.

1. The Establishment Is No Longer Profitable

Dwindling profit is the main driver behind business closures. For many owners, there comes a point when the numbers do not add up. Roughly 38% of startups fail because they run out of capital to keep their operations running. 

This could stem from many reasons, from unexpected expenses to market downturns and an inability to hit revenue targets. If profits are no longer sustainable and funding sources are exhausted, it may be wise to close your doors rather than shoulder mounting losses.

2. You Are in Debt

Debt is a part of life for most Americans — about 80% carry some form of debt, from credit card balances to student loans. While manageable debt can be a normal component of operations, excessive debt is another matter entirely. 

Persistent debt can quickly overwhelm a company that is not generating income. It traps you into a cycle of increasing financial strain. If debt levels make it challenging to keep your establishment, it could be time to shut down and focus on economic recovery.

3. It Is Becoming Impossible to Keep Your Business on Hold

An inactive company still requires resources to maintain compliance, pay fees and fulfill ongoing obligations. Over time, these maintenance costs can increase, especially if you divert funds and attention to other pursuits. 

Holding onto a nonoperational venture may seem feasible initially, but keeping it afloat can become more trouble than it is worth. When the strain of maintaining an inactive company outweighs the benefits, closing it may be the best option.

How to Close an Inactive Business

If you’re one of the approximately 595,000 businesses that cease operations annually, the following are six necessary steps to close your company properly.

1. Create a Closure Plan

Closing a shop involves several moving parts and setting a realistic timeline. You can create a closure plan to keep everything on track and prevent costly last-minute issues. This should include creating a checklist of essential tasks covering everything from legal filings to financial settlements. Then, establish deadlines for each task, noting any state or federal requirements that may impact timing. 

Closing a firm also comes with costs. Expenses can add up, so it is wise to set a budget early in the planning process. Factor in costs such as legal fees for dissolving your entity, asset liquidation and final payroll. Allocating a budget prepares you for the financial aspects of closure without adding unnecessary strain on your personal finances.

2. Liquidate Assets and Inventory

Once you have created a plan to shut down your business, liquidating assets and inventory can help you recoup some of your investment and settle outstanding debts. If your company sells physical products, consider holding a clearance sale to attract customers and move merchandise quickly. You may even have relationships with other establishments interested in purchasing your inventory at discounted prices.

If your establishment has furniture or equipment, selling or auctioning them off is wise to generate additional revenue. Auctions can effectively reach multiple buyers and drive up the final sale price. 

3. Inform Vendors and Contractors

Informing vendors and contractors ensures a smooth transition and avoids potential disputes. Properly managing these relationships as you wind down operations will maintain your reputation and finalize any outstanding obligations.

First, give your vendors plenty of notice about the closure. This courtesy allows them to make adjustments, such as halting future shipments or closing your accounts. Be clear about your closure timeline, including any last orders, payments or deliveries. 

If contracts are in place, review them to identify cancellation policies or penalties for early termination. Clearly communicating this information prevents misunderstandings and ensures a seamless exit.

4. Settle Financial Obligations

Another critical step in shutting down your company is finalizing debts, taxes and other financial responsibilities. This ensures a smooth exit and avoids potential legal complications. 

The first priority should be addressing outstanding debts. Start by listing all debts, including loans, lines of credit and unpaid invoices from vendors or service providers. Next, you can contact creditors to notify them of your closure and arrange final payments. If you have limited funds, consider negotiating a settlement to reduce costs. 

According to the IRS, closing a business requires you to submit final federal, state and local tax returns. For instance, if you are a sole proprietor, you must file forms like Schedule C, Profit or Loss and Schedule SE if you earned $400 or more from your company. 

Consult with an accountant to ensure you complete all required filings accurately and on time, as tax authorities may impose penalties for missed filings. 

5. Close Legal and Financial Accounts

Many firms require licenses and permits to operate legally. To avoid fines, contact your local and state licensing authorities to cancel permits associated with your company. Some jurisdictions require proof that your business is no longer active, so keep copies of your closure documentation. 

After paying all debts, it is also time to wrap up your bank accounts, including checking, savings, credit cards or lines of credit. When informing your bank of closure, verify that all outstanding checks and payments have cleared and request a final statement for your records. 

6. Deregister Your Business

Deregistration is the legal process of informing local, state and federal authorities of your closure. This step is vital in preventing tax liabilities and ensuring you are no longer responsible for fees or regulatory requirements. 

Many enterprises register themselves with the state and local offices. If you registered your company to pay state sales tax or obtain a local operating permit, you must cancel these. Requirements for dissolution vary by location, so check with your state’s division for specific instructions and fees. 

Additionally, if you have an Employer Identification Number (EIN) from the IRS, notify them of your closing by submitting a letter stating your intent to shut down. Although the IRS does not cancel EINs, formally notifying them ends its association with an active business. 

Finalizing Your Business Closure With Confidence

Closing an inactive business is a paramount decision that you should consider carefully. It takes many steps and careful planning to conclude a company’s operations. Once you follow the right process, you will be ready to move forward confidently.