Closing, Selling or Declaring a Business Bankruptcy? Here Are Your Need-to Knows

Operating a business, even a small one, can be rewarding and yet challenging at the same time. The flexibility of working at your own pace and having full control over your own business is coupled with the increased tax reporting responsibilities.

At times, you may need to make the tough decision to close a business or take a step back and reorganize it in order to remain financially viable.

Here are a few frequently asked questions about changing your business structure, closing down a business, declaring bankruptcy or selling your business.

What do I do if I want to change my business structure?

If you want to change the nature of your business, then you may need to re-apply for a different Employer Identification Number (EIN). If you are keeping the business model the same, but simply changing the nature of the business (such as selling a different product or service), you likely can keep the same EIN.

However, if the ownership of the business has changed, you will need to reapply and report under a different EIN. An example of an ownership structural change is incorporating from a sole-proprietorship, or switching to a partnership.

If you are simply changing your business name, moving locations or switching from a regular corporation to an S-Corp (Shareholder Corporation), you need not reapply for a new EIN.

I need to close my business down. What do I need to do?

In general, the main task you will need to do is to formally notify the IRS that your business is defunct. This is done by filing a “final” tax return.

Most business tax returns provide a box that you can check to indicate it is a final return. By checking this box, the IRS will close out any future filing requirements under that EIN. It is possible to reactivate that same EIN again in the future if need be.

If you have employees, you will need to file a final Form 941, as well as report and pay all final tax withholdings that you have deducted from their pay. Mark the return as “final,” and attach a statement to your return showing the name and address of the person who will be housing the payroll records. If you have used a payroll service, you will need to obtain these records from them.

What if I have to declare a business bankruptcy?

As with any bankruptcy, the automatic stay of collections is initiated when the paperwork is filed in the appropriate jurisdiction. Most incorporated businesses will file under Chapter 11 and most sole-proprietorships will file a Chapter 7 bankruptcy.

Although certain taxes can be dismissed with a bankruptcy filing depending on the chapter filed and the age of the tax debts, any trust fund taxes (taxes that represent your former employee’s federal tax withholdings) cannot be absolved via a bankruptcy. If the business is insolvent, you will be personally held liable for these payroll taxes.

For more information on bankruptcy filing, see the related article linked below.

What if I choose to sell my business?

The sale of a business takes into account more than just the sale of the name and any clientele that you may have established. The business property and all equipment must be inventoried and categorized for tax reporting purposes.

According to the IRS, assets must be classified as capital assets, depreciable property used in the business, real property used in the business, or property held for sale to customers, such as inventory you have and now are selling off. The potential capital gain or loss on each asset is figured separately.

For more information on selling business assets, including real property, review Publication 544, Sales and Other Dispositions of Assets, and the instructions for Form 4797, Sales of Business Property.

More from this Contributor:

Bankruptcy and IRS debt – The basics you need to know

Everything you never wanted to know about capital gains tax

Small Business Taxes FAQs

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