Closing a Business

Closing a sole proprietorship when there are no employees involved is a snap. Simply file your final Schedule C the same way you always have in the past to report any income and expenses in the final year of business. That's it!

The IRS doesn't require that you inform them that you're filing a final Schedule C or that you closed your sole proprietorship. In fact, there isn't even a place on Schedule C to indicate that it's a final return.

In addition, you don't have to add any comments on Schedule C about the closing either. Just complete Schedule C as usual and file it.

Keep in mind, the only time you must file Schedule C is when your business has either income or expenses, or both, during any tax year. So, if you have neither, then you simply don't file Schedule C for that year.

Corporations or Partnerships

If your business is unincorporated (i.e. a sole proprietorship), you generally don't incur the types of winding up expenses incurred by corporations and partnerships.

Corporations and partnerships generally incur legal and accounting fees to dissolve the corporation and close the partnership. For example, the books have to be closed, financial statements prepared, gains and losses determined, tax returns prepared and filed, final payments made to employees, and final distributions made to owners.

If a corporation is closed:

  • Form 1120 - Line E(2) is used to indicate it's a final return.
  • Form 1120S - Line F(2) is used to indicate it's a final return.

The IRS must be notified of the corporation's termination by filing Form 966, Corporate Dissolution or Liquidation. Form 966 must be filed within 30 days after the plan or resolution of liquidation is adopted.

State Requirements for Dissolving a Corporation must also comply with your state's requirement for dissolving the corporation. A corporation must be formally terminated and state tax obligations must be up to date. It's not like a sole proprietorship, where you simply stop filing Schedule C and go on your merry way.

Contact your state's Corporation Commission (or whatever the appropriate agency is called in your state) to find out the appropriate procedures to follow.

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