When businesses close, they sometimes do not file taxes for their last year in operation. These taxes are still owed, and if any business has not closed its doors in accordance with state and federal laws, California’s Franchise Tax Board and the IRS will go after the money they’re owed. Penalties can be substantial, and may include liens issued against future income from the business or its former owners.
With guidance from an experienced tax professional, any closed business can be sure the proper taxes are paid or that they prepared when the state or IRS comes after their tax dollars. All business owners should also be aware of the proper procedures for closing a business.
How to Properly Close a Business
No matter the reason for closing your business, a business owner always should have a grasp of the full scope of the financial and tax implications of dissolution. Knowing each step, why it’s necessary, and what the implications are if it’s not properly followed will help any business get a complete picture of the process.
The first step of closing a business is to notify everyone involved and the proper government agencies. Partnerships and LLCs will have to follow the terms of their dissolution agreement. Sole proprietorships or partnerships without such agreements will only have to notify any partners or board members.
Sole proprietors also will not have to file with the state, but they should resolve any outstanding bills. LLCs and general partnerships must file dissolution papers with the state, letting creditors know that your business cannot take on any more debt. After the decision to dissolve the business has been agreed upon, a Certificate of Dissolution must be filed.
The IRS must also be notified of the closure. A thorough checklist of everything a business needs to do when closing to comply with the federal government is available from the IRS.
It’s critical that your business continues to pay owed taxes to the IRS after it’s closed. File quarterly, annual, and capital gains taxes, and continue to pay necessary payroll taxes for the prior and current year. The IRS takes unpaid payroll taxes particularly seriously. Be sure to file all the appropriate federal forms the IRS requires for closure. Some due dates on tax forms may also change or be expedited if a business be closing.
Tax Collection in California: What to Know
Tax laws vary from state to state, so it’s important to know certain facts about how California’s tax laws may affect your situation.
‘Responsible Person’ Standard
California uses a “responsible person” standard in determining who is liable for a business’s unpaid taxes. A “responsible person” is any manager, partner, shareholder, etc. whose responsibilities within the organization include filing and paying business taxes.
In California, a responsible person is liable for unpaid sales and use taxes, as well as interest and penalties on those taxes. He or she may also be liable for taxes on purchases a company executed as a consumer.
Statute of Limitations
The statute of limitations for California sales tax is three years from the date a return is filed. If the state does not have proper knowledge of a company’s closing, however, assessments against a responsible person can be filed eight years after a company is closed.
Any company taxes owed should be taken seriously. Properly preparing for and being able to handle post-closure tax collection from the IRS may require the help of a tax professional. The penalties can be substantial, especially to business owners who have recently closed shop.
Reaching out to the tax firm at Milikowsky Tax Law puts a professional on your side with your best interests in mind in the event the IRS or state goes after money owed by your closed business.