Starting a new business is an exhilarating experience as you learn several things. And when you decide to close it, not sell it or transfer ownership to a successor, but shut it down, it takes a lot of courage. Business owners may close the business for several reasons: maybe they are retiring and don’t want to share the ownership with anyone else, the market circumstances force them to shut down, or things are not falling into place. Don’t let a business failure take away your entrepreneurial passion. Instead, use it as a lesson to make the next business successful.
How To Close a Business?
Once you agree that closing the business is the only way forward, you should do it systematically. It is like reversing the steps you took to start the business.
Complete Your Operational Obligations
The first step in closing the business is ceasing all business operations and doing the final settlement with all parties involved:
Customers: Complete all the pending work, send the final invoice, collect all accounts receivable, and close any contracts signed with the clients.
Suppliers: Cancel any real estate or equipment leases, software subscriptions, or recurring expenses, end the supply agreement and inform everyone that you are closing the business. If you own work premises, close the office and move out.
Employees: Compassionately let go of your staff and pay all outstanding salaries, severance pay, and CRA remittances (like Canada Pension Plan, Employment Insurance (EI), and income tax) deducted from their salary. Ensure you file a Record of Employment (ROE) within five calendar days after their last pay period so they can claim EI benefits.
Close other operating accounts: You might have to cancel municipal licenses and notify the Workplace Safety and Insurance Board within ten days of closing your business. If you have an employer health tax, you must file your final EHT return within 40 days and notify them of closing.
While the above steps can close your business operations, they will not dissolve your business. A company can still exist without operations. It will become a holding company that has assets and liabilities. The next step may need an accountant, lawyer, and business advisor to plan the shutdown.
Adjust Assets and Liabilities
Assets: Once you have taken care of operations, it is time to liquidate any non-cash assets. You can sell the investments, inventories, property or equipment to third parties for cash at fair market value. If you or any other shareholder wants to take some assets, you can transfer the ownership and record it as shareholder withdrawal at the asset’s fair market value. An accountant can help you determine the fair market value of the capital assets.
Liabilities: You should clear out all the liabilities, such as loans, credit cards, bills, and taxes, to protect your assets from these obligations. Once these liabilities are paid, close the credit card or loan accounts. You might also want to check for any outstanding lawsuits. And if you put any money in the business as a shareholder loan, you must repay that loan to your account.
This way, you have to clear the company of any assets and liabilities.
Complete Your Obligations to Shareholders
After you have offloaded all the assets and liabilities, it is time to distribute the lifetime profits and losses, which are reported as Retained Earnings on the balance sheet, to shareholders. As the distribution of profits and losses to shareholders might be complex, you should seek the assistance of a tax consultant.
For instance, negative retained earnings must be distributed according to Allowable Business Investment Losses (ABIL). The shareholder can deduct these losses from their taxable income and get tax benefits. They can carry forward the loss for ten years or take it back three years to utilize all the losses.
The distribution of positive retained earnings in one go could attract significant tax to the shareholders. Hence, transferring the dividend slowly over time to minimize taxes is better.
Complete Your Tax Obligations
The next step involves clearing all your dues with the CRA and closing all accounts related to the business. You might want to work with a tax consultant to ensure the process is duly completed.
- GST account: You must file all your outstanding GST/HST returns up to the day your operations ceased and you stopped collecting GST from customers.
- Payroll account (RP): After the final payment is made, you must file the final T4s for your employees and ROEs.
After filing the returns, pay all your dues and collect any refunds from GST and payroll. Once this is done, close your GST account and payroll account.
Corporate Tax Account (RC): As we said before, there could be a time difference in ceasing business operations and dissolving the corporation. While the CRA requires you to file at least one final tax return, it is a good practice to file final tax returns – one when ceasing operations and one when dissolving the corporation, which would be a nil return since the company has no operations, assets or liabilities.
Information Return Account (RZ): You have to file a T5 investment income report on the retained earnings disbursements you made to shareholders when closing down operations.
The CRA will automatically close your CR and RZ once your final tax return and notice of dissolution have been received.
Close Your Business Accounts
Once all your dues are paid and all business activities have ceased, you should cross-check all your accounts, bank accounts, credit card accounts, PAD agreements, and recurring credit card transactions if they stand cancelled. Also, look for any cheques that must be cleared from your account.
It is time to close every account under your business name, be it payment processing or money transfer accounts, savings or investment accounts.
After closing all accounts, complete the final bookkeeping by recording all the above transactions in your accounting system. Your business is now ready for dissolution.
Dissolve Your Corporation
Closing a sole proprietorship or partnership would require cancelling the registration of your business. However, if you are dissolving a corporation, you can apply for a certificate of intent to dissolve while following the above steps. You can stop the dissolution process anytime by revoking your intent to dissolve.
You can directly apply for a certificate of dissolution when the corporation has no property or liabilities. Once this certificate is issued, you cannot revoke the certificate. You can either file articles of dissolution orallow the corporation to die by not filing an annual report with the province, which gradually leads to automatic dissolution by the corporate registry in a few years. In this method, you will still have to file nil tax returns for the intervening years until the corporation is dissolved.
Contact Ford Keast LLP in Southwestern Ontario for Support with Closing Your Business
A skilled business consultant and tax advisor can help systematically close your business, ensuring the entire process goes smoothly and there are no gaps. At Ford Keast LLP, our tax experts and business consultants can provide services to support your business dissolution, whether you need partial or complete support. Contact us online or call us at 519-679-9330.