If you’ve run out of runway and you’re out of options, it might be time to hang up your hat. Don’t fling it onto that hat rack just yet, though. Before you can shut down a tech company (or any company, for that matter), you need to take certain steps.
Failing to follow the proper procedures can lead to headaches down the road. We’ve even seen founders have issues crop up years after they shuttered a company. And since you’re already going through the difficult season of shutting down your tech company, the last thing you want is to have additional challenges arise.
Fortunately, as specialists in tech company tax compliance, we can guide you through what you need to know. If you’re closing up shop, read this guide first.
You can’t be the one to call the shots. Once you’ve incorporated, your board of directors has to approve your decision to call it quits. This usually takes the form of a board-approved corporate dissolution paired with a plan of liquidation.
Your board isn’t the only group you need to loop in. As you make a plan to end operations, create a strategy for notifying:
You want to be tactful about who gets notified and when. You don’t want your employee finding out from a customer that you’re shuttering, for example.
Liquidate remaining assets
The liquidation plan you agree to with your board should make this fairly straightforward (even if agreeing on the plan itself was anything but). Between the plan and your tech company’s cap table, it should be fairly clear who gets what.
The heavy lift here generally comes from actually selling off the assets. Whether you need to liquidate inventory, office furniture, or anything else, start exploring potential buyers now. That’s doubly true if you need to settle debts. Getting top dollar for what you still have goes a long way toward making your life easier. It’s much simpler to dissolve a business if you won’t have creditors standing in your way.
Also, remember that distributions from the liquidated assets need to be reported to the IRS. So if there’s anything left over for you to pocket, keep a careful record of it.
Close all accounts
This means bank and credit card accounts, of course. But the list extends far beyond that. You also need to close any accounts pertaining to:
- Payroll (that includes including Department of Labor, withholding, and state unemployment insurance accounts)
- Workers’ comp
- Disability insurance
- State sales tax
- State franchise tax
- State income tax
If you were operating out of multiple states or you had remote employees who moved to different jurisdictions, make a list of everywhere you might potentially have a nexus. Research local laws to ensure you’re compliant with account closure requirements in every applicable state.
Submit your final tax filings
Some states (including Delaware) require you to get fully paid up on your taxes before you can dissolve your corporation. You might need to pay the current calendar year’s franchise tax before you can officially close up shop, for example.
If you’re reading this before the end of 2023, talk to your accountant soon. Acting fast might save you from being subject to 2024 taxes.
You and your accountant should partner together to prepare your last tax filings. The IRS requires a specific final tax filing, along with a few other things, before they’ll consider things settled with your company. Working with an accountant who has experience helping tech companies dissolve can go a long way toward helping you avoid missteps.
Dissolve your entity
It’s time to make things official. With approval from your board, you can now file the paperwork to close your corporation. Some states call this a Certificate of Dissolution, while others call it Articles of Dissolution. Either way, this is the official document that lets the state know your company will no longer operate.
It’s key to file your dissolution paperwork as close as possible to the date on which you terminate operations. Until this paperwork is in, your corporation continues to exist in the state’s eyes. And that means it continues to be subject to obligations like quarterly estimated taxes. A lag in getting your dissolution paperwork in could land you with a bigger tax bill or fines for noncompliance.
You also need to notify the IRS of your dissolution. To cancel your IRS business account (once your taxes are fully paid up), you send them a letter with:
- Your business’s legal name
- Your business EIN
- Your business address
- The reason you’re closing
- A copy of your EIN notice letter (the one that assigned you your EIN)
File away key info
While you might be tempted to wash your hands and walk away from this whole ordeal, you need to keep certain documentation. This way, if you ever get audited in the future or a state authority comes forward saying you never met some requirement, you can defend yourself.
Specifically, if your tech company claimed federal or state R&D tax credits, save anything substantiating the amount you claimed. That includes payroll records for applicable peoples’ salaries. You might also want to download records from tools you use like GitHub, Jira, or Asana, product roadmaps, or anything else that outlined or detailed the R&D process.
If you took any pandemic aid (like PPP or EIDL), save documentation around that, too. Tax authorities don’t work overly quickly and it’s not uncommon to get audited several years down the road.
Finally, export and download the following to add to your file:
- General ledgers
- Financial statements
- Accounts payable
- Accounts receivable
Obviously, you can’t just lock the door and walk away. When you’re closing a tech company, there’s a lot you need to get handled. Fortunately, you don’t need to do it alone.
Our team specializes in supporting tech startups, and that means we’ve helped our fair share of businesses navigate liquidation and dissolution. For guidance on appropriately distributing liquidated assets, filing your final tax returns, and more, contact our team. We can help you navigate your closure as neatly and quickly as possible, freeing you up to pursue your next venture.