Closing a sole proprietorship is a straightforward process that involves a few essential steps. However, the exact procedure and any paperwork involved will depend on the laws in your state. In this article, we will outline the general process of closing a sole proprietorship and answer the question: “How to close your sole proprietorship?”

How to Close Your Sole Proprietorship?

The steps to close your sole proprietorship are as follows:

1. File a Final Return and Related Forms

The first step is to file a final return with the IRS and any other applicable forms. This includes filing a final income tax return, Form 1040 and Schedule C (Profit or Loss from Business), as well as any other forms related to taxes, such as a final employment tax return, Form 941.

2. Take Care of Your Employees

If you have any employees, you must take care of them first. You must pay any outstanding wages and benefits, issue final paychecks, and inform the employees about the closure of the business.

3. Pay the Tax You Owe

You must pay any taxes that you owe to the IRS and your state and local tax authorities.

4. Close Your Business with the IRS and State and Local Tax Authorities

To dissolve a sole proprietorship, you must notify the IRS as well as state and local tax authorities that you no longer operate the business. With few official requirements, closing a sole proprietorship can be as simple as ceasing operations and tying up a few loose ends.

How to Dissolve a Sole Proprietorship?

Most states allow a sole proprietor to close shop without any formalities. However, it’s important to dissolve in an orderly manner. Send letters to your suppliers, customers, and other business contacts to inform them of the closure of your business. Also, cancel any business licenses, permits, and registrations you have.

To officially dissolve a sole proprietorship, you must:

  • Notify your creditors about the closure of your business and make arrangements to pay any debt.
  • File the appropriate paperwork with the IRS and any other applicable tax authorities.
  • Cancel any business-related licenses, permits, and registrations.

Lastly, you should close any business checking accounts and cancel any credit cards associated with the business.

By following these steps, you can easily and efficiently close your sole proprietorship. For more information about selling a business, or for answers to any other questions about business brokers, visit

How simple is it to shut down a sole proprietorship?

A sole proprietor must draft and send a letter to the IRS which contains the full name of the business, the employer identification number (EIN), the business address, and an explanation for why they wish to shut down the account.

What is the difficulty level of shutting down a sole proprietorship?

A sole proprietorship does not need to be officially registered with the state, so to end the business, all debts must be paid, any accounts with creditors must be shut down, and all documents related to taxes must be kept.

Must you inform the Internal Revenue Service when you shut down a business?

You must submit Form 1065, U.S. Return of Partnership Income, for the year you conclude your business. As part of the filing, you have to list any capital gains and losses on Schedule D (Form 1065). Additionally, make sure to mark the “final return” box (located at the top of the front page of the return, beneath the name and address).

Should I get rid of my EIN if I shut down my business?

Once you have fulfilled all of your tax obligations, submit a request to the IRS to terminate the Employer Identification Number (EIN) account that is associated with your business. While this will end your tax obligations, the EIN will still remain assigned to your business and cannot be reassigned to another entity.