Q&A: How to close a business formed with your ex-spouse

Dissolving a company can have legal and tax effects if done incorrectly; make sure to seek legal advice

Your Business Credit columnist Elaine Pofeldt
Elaine Pofeldt is a journalist whose articles on entrepreneurship and careers have appeared in Fortune, Working Mother, Money and many other publications. She is a former senior editor at Fortune Small Business magazine and an entrepreneur herself, as co-founder of 200kfreelancer.com, a website for independent professionals. She writes "Your Business Credit," a weekly column about small business and credit, for CreditCards.com.

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Question Dear Your Business Credit,
I opened a construction company for my husband – now my ex. I would like to close the company and take out my Social Security number. How should I proceed? Thanks. – Alice

Answer Dear Alice,
One of the trickiest areas of small business is going into business with someone else, whether a spouse or a business partner. It can become very challenging when an owner wants to leave the company.

You did not say what type of business entity you formed. What I would recommend is to contact your state corporation counsel’s office to find out what the procedures are to disband that type of company.

States typically publish rules on what it takes to cancel, withdraw or dissolve a business online, so if you search for terms such as “cancel a business” or “dissolve a business” online with the state name, you should be able to find the rules.

Paperwork requirements vary by state
As you’ll discover, there is some paperwork involved to remove the business from public records and tax records. Those steps may be different for an LLC versus a domestic corporation. The paperwork requirements vary by state, and you may have to first ensure the company is in “good standing” before you can submit it – meaning it has met statutory requirements.

It is important to file the paperwork because if you don’t, the entity will still be required to pay certain taxes – and possibly penalties if you fall behind on those taxes. I encourage you to check out this letter from a reader in California about the potential consequences of closing a business in that state.

Once you have filed the state paperwork, you must also notify the IRS that you have disbanded the company. The IRS has published a checklist on what to do.

I would highly recommend you work with a business attorney in your state on submitting the paperwork to both the state and the IRS. Although it’s possible to take the DIY approach, you don’t want to miss a form and then find out years later you owe thousands of dollars in taxes and penalties.

Pro bono opportunities to seek legal help
If hiring an attorney is beyond your budget, you may be able to find one who will help you pro bono. The Department of Justice publishes a list of pro bono legal service providers where you can search by state. You might also call the law schools in your area to see if they operate a law school clinic that offers free help to the public. A good place to start is with the public law schools.

You did not mention what your current relationship with your ex-husband is like or if he actually wants to close the business. If he does not want to, an attorney can help arrange for him to buy out your ownership stake. If he does not have the money to do that, the attorney can advise you on what your legal options are.

There may be some hassles involved in working this out. Still, in the long run, it is best to remove yourself from ownership of the business if you don’t want to be a part of it anymore, so you are not responsible for any debts and liabilities it incurs.

See related: Closing joint bank account after a breakup, What's a fair card arrangement in a business partnership?

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Updated: 11-23-2017