Building It—and Closing It—Right: A Guide to Business Formation & Dissolution

The Center for Financial, Legal, & Tax Planning, Inc.
13 minutes ago
2 min read

Starting and ending a business are two significant milestones in the life cycle of any company. Both processes involve careful planning, legal steps, and strategic decisions. Knowing how to navigate the formation and dissolution of a business can save time, money, and stress. This post breaks down these processes into clear, practical steps to help entrepreneurs and business owners understand what to expect.

How a Business Is Formed

Forming a business begins with an idea, but turning that idea into a legal entity requires several key actions:

Choose a Business Structure

The structure affects taxes, liability, and management. Common types include sole proprietorship, partnership, limited liability company (LLC), and corporation. For example, an LLC offers personal liability protection and flexible tax options, making it popular among small business owners.

Register the Business Name

The business name must be unique and registered with the appropriate government agency. This step protects the brand and ensures no other company uses the same name in your state or country.

Obtain Necessary Licenses and Permits

Depending on the industry and location, businesses may need specific licenses to operate legally. For instance, a restaurant requires health permits, while a construction company might need safety certifications.

Apply for an Employer Identification Number (EIN)

This number is issued by the tax authority and is essential for tax reporting, hiring employees, and opening business bank accounts.

Open a Business Bank Account

Separating personal and business finances simplifies accounting and protects personal assets.

Each of these steps involves paperwork and fees, but completing them ensures the business operates within the law and builds a foundation for growth.

What Happens When a Business Ends

Dissolving a business is as important as forming one. It involves closing operations, settling debts, and complying with legal requirements to avoid future liabilities.

Make the Decision to Dissolve

Owners should agree on the decision and document it formally, especially in partnerships or corporations.

Notify Stakeholders

Inform employees, customers, suppliers, and creditors about the closure. This transparency helps manage expectations and maintain good relationships.

Settle Debts and Obligations

Pay off outstanding bills, loans, and taxes. If the business cannot cover all debts, owners may need to negotiate with creditors or seek legal advice.

File Dissolution Documents

Submit the necessary forms to the government agency that registered the business. This step officially ends the business’s legal existence.

Cancel Licenses and Permits

Closing permits prevents unnecessary fees or legal issues after the business stops operating.

Handle Remaining Assets

Distribute any remaining assets among owners or shareholders according to the business agreement or law.

For example, a small retail store closing after several years would follow these steps to ensure all financial and legal matters are properly wrapped up.

Practical Tips for Smooth Formation and Dissolution

Keep Detailed Records

From the start, maintain organized records of all business activities, contracts, and financial transactions. This practice simplifies both formation and dissolution.