Shutting down a business is rarely anyone's favorite project, but how you close matters as much as how you operated. Stop paying the bills without formally winding down, and you can keep getting state fees, IRS notices and penalties for years after the doors are shut. The IRS and your state each have a defined process; work through it in order.
This is general information, not individual tax advice — the right treatment depends on your specific situation.
1. Make It Official and File State Dissolution Paperwork
Start by documenting the decision: a board or shareholder resolution for a corporation, or a written agreement among the owners of an LLC or partnership. Then file dissolution paperwork (often called articles of dissolution or a certificate of cancellation) in your formation state and in every other state where you registered to do business. The SBA warns that if you fail to legally dissolve an LLC or corporation, you can keep owing taxes and filings in those states. Sole proprietors usually don't have an entity to dissolve, but should still cancel any trade names (DBAs), licenses and permits.
Corporations have one extra federal step: file Form 966, Corporate Dissolution or Liquidation, within 30 days after the resolution or plan to dissolve is adopted. If the plan is amended later, another Form 966 is due within 30 days of the amendment.
2. File Your Final Income Tax Return
Your final federal return depends on your entity type:
Sole proprietors and single-member LLCs report the final year on Schedule C with your Form 1040, plus Schedule SE if you owe self-employment tax.
Partnerships and multi-member LLCs file a final Form 1065, checking the "final return" box near the top of page one and the "final K-1" box on each partner's Schedule K-1.
C corporations file a final Form 1120, and S corporations a final Form 1120-S with final K-1s, each with the final return box checked. Watch the calendar: a dissolved C corporation generally must file by the 15th day of the 4th month after the date it dissolved, and a dissolved S corporation by the 15th day of the 3rd month.
3. Report Asset Sales Correctly
Most closures involve selling equipment, vehicles, inventory or the entire business. Sales of business property go on Form 4797, and capital gains and losses flow through Schedule D. If you sell a group of assets that make up a business, and goodwill or going-concern value attaches or could attach, the buyer and seller each generally file Form 8594, Asset Acquisition Statement, to report how the price was allocated across asset classes. Agree on that allocation in the purchase agreement, since it drives your tax bill.
4. Close Out Payroll and Contractor Reporting
If you had employees, pay all final wages and deposit the withheld taxes. The Trust Fund Recovery Penalty can make owners and responsible officers personally liable for unpaid withholding. Then:
Form 941 or 944: File your final return for the quarter or year final wages were paid, checking the box that the business has closed and entering the date of final wages.
Form 940: File a final federal unemployment tax return, checking the "final" box.
Forms W-2 and W-3: Give employees their Forms W-2 by the due date of your final Form 941 or 944, and send Copy A to the Social Security Administration with Form W-3.
For independent contractors, file Form 1099-NEC for the year you close. For payments made in 2026, the reporting threshold rose to $2,000 per payee for the year (it was $600 for 2025 payments), and starting in 2027 the threshold will be adjusted for inflation.
5. Handle Owner Distributions and Final Bookkeeping
Before money goes to owners, pay or settle creditors, final payroll and taxes. Remaining cash and property are then distributed. A corporation that liquidates generally reports those payments on Form 1099-DIV in the boxes for cash and noncash liquidation distributions. Partnership distributions show up on the final K-1s.
On the books, the goal is a clean zero: reconcile every bank and credit card account through the closing date, collect or write off receivables, pay off payables, record asset sales and depreciation, book the final distributions, and close bank accounts only after the last checks have cleared. A tidy final balance sheet is what makes your final returns accurate.
6. Close State Tax Accounts, Cancel the EIN and Keep Your Records
Close each state tax account you opened: sales tax, state payroll withholding, unemployment insurance, and franchise or excise tax. Most states require a final return for each account before they will close it. To close your IRS business account, send a letter to the IRS (the IRS's “Canceling an EIN” page currently lists mail stops in Kansas City, MO and Ogden, UT — check it for the current address) with the business's legal name, EIN, address and reason for closing. Include a copy of your original EIN assignment notice if you have it. The IRS can't close the account until every required return is filed and all tax is paid.
Then keep your records. The general IRS rule is three years after filing. Employment tax records must be kept for at least four years after the tax is due or paid. Records about property should be kept until the limitations period expires for the year you dispose of it. Longer periods apply in some situations, so many owners keep the full set for at least seven years.
How VarStan Helps
VarStan's CPA-led team can map out your wind-down timeline, close the books, prepare final returns and payroll filings, handle asset-sale reporting, and confirm that each state and IRS account is properly closed. If you're thinking about closing or selling, reach out before you sign anything. A short planning conversation now can save you from surprise notices later.
Related reading: Trump Accounts: What Parents & Small Business Owners Need to Know and Beyond Tax Filing: Why Your CPA Should Be a Year-Round Partner.