Closing a business: a federal and state tax checklist

Closing a business takes more than locking the door. Filings left unfinished can come back years later as tax notices, penalties or an entity that still owes annual state fees.

This guide lists the main federal and state tax steps. It is general information, and every business needs its own plan based on its entity type, state and open obligations.

How do you close a sole proprietorship?

A sole proprietor reports the final year of business on Schedule C with the owner's Form 1040. If you had employees, file final payroll returns and give employees their final Forms W-2.

Report the sale or other disposition of business property, and file any final information returns, such as Forms 1099-NEC for contractors paid in the final year. If you registered a trade name or hold a local business license, cancel those as well.

How do you close a corporation or LLC?

A corporation files its final Form 1120 or Form 1120-S and checks the final return box. If the shareholders adopt a resolution or plan to dissolve the corporation or liquidate its stock, it files Form 966 within 30 days after adoption. A partnership, including a multi-member LLC taxed as one, files a final Form 1065 and final Schedules K-1.

The entity also has to be dissolved under state law. That usually means filing articles of dissolution or a similar document with the secretary of state, paying or settling debts, and distributing what remains to the owners. Requirements, fees and timing vary by state.

What payroll filings are needed?

If the business had employees, file a final Form 941 for the quarter wages were last paid and a final Form 940 for the year, checking the boxes that show the business stopped paying wages. Give employees their Forms W-2 and file them with Form W-3.

Pay all withheld and employer payroll taxes before closing. Our guide on payroll tax basics for employers explains these forms. Close state withholding and unemployment accounts once the final reports are filed.

How are asset sales reported?

Sales of business property, such as equipment or real estate used in the business, are generally reported on Form 4797. Depreciation taken in earlier years affects the gain, so the asset records matter here.

When a group of assets that makes up a business is sold, the buyer and seller generally each file Form 8594 to report how the price was allocated among the assets. Selling stock or an ownership interest is a different transaction with different tax results.

What should be closed after the final returns?

Once every final return is filed and the taxes are paid, work through the remaining accounts:

• The business account with the IRS, closed by letter
• State income, franchise, sales and payroll tax accounts
• The entity's registration with the secretary of state
• Business bank accounts, after final payments clear
• Local licenses and permits

Keep the books after closing for the full retention period, as covered in how long to keep tax records. For help planning the sequence, see our closing or selling a business service, and check current IRS and state guidance before you file.