Closing down a sole proprietorship

Your Guide to State, Local, Federal, Estate + International Taxation

Unfortunately, due to Covid-19, a lot of individuals have had to make the difficult decision to close their businesses. Closing a sole proprietorship legally has several steps and boxes to check to make sure the business is permanently closed. Here are the steps the IRS has laid out to help you close your sole proprietorship. You should still check with your attorney and state requirements to make sure you are covered in all areas.

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A sole proprietor is someone who owns an unincorporated business by themselves. These business owners file a Schedule C – Profit or Loss from Business with their Form 1040 and pay self-employment taxes on the earnings. In the year the business is closed, the individual must also file a Form 4797 – Sales of Business Property if property used in the business is sold or exchanged, a Form 8594 – Asset Acquisition Statement if the business is sold, and/or a Schedule SE if there was income during the final year subject to self-employment tax.

If the sole proprietor has employees, final federal and state tax deposits will need to be made for the employees’ payroll taxes. All payroll reports will need to be filed for the applicable quarter and year, have a final date wages were paid, and be marked final by the sole proprietor. These forms include, but are not limited to, Federal Forms 940, 941, W-2 and W-3 and Arizona Forms A1-QRT and Form UC-018. If you have employees in other states, the payroll forms will differ.

When the business is closed, certain records need to be maintained for recordkeeping purposes. The length of time certain records needs to be kept depends on the action, expense, or event which the document records. You can find the recordkeeping rules here. One document that has strict recordkeeping rules are the payroll forms mentioned above. These forms should be kept for four years.

The final task that needs to be done when closing your business is notifying the IRS. You will need to write a letter to the IRS that includes the legal name of the entity, the EIN number (and a copy of the EIN number assignment letter from the IRS if you have it), the business address and the reason for the close of the account. This can only be done after all the appropriate forms mentioned above have been filed.

Once all these tasks have been completed, the sole proprietorship will be closed, and no further action will need to be taken. Please visit the IRS website here to review all of the rules for closing a sole proprietorship or contact a Henry+Horne professional with any questions.

KC Kolb, CPA