Join Jarrod and special guest Steve Levy, CPA & JD, in this eye-opening episode as they delve into preparing your practice for retirement. Discover the essential steps and to-dos that every practice owner should consider when winding down their business to ensure a smooth transition into retirement.
Announcer:
Hello, everyone. Welcome to the Millionaire Dentist podcast, brought to you by Four Quadrants Advisory. On this podcast, we break down the world of dentistry finances and business practices, to help you become the millionaire dentist you deserve to be. Please be advised, we do speak with an honest tongue. And may not be safe for work.
Jarrod Bridgeman:
Hello, and welcome to another episode of the Millionaire Dentist. I am your host, Jarrod Bridgeman. Casey Hiers is out of town this week, for an event. With me, I have Steve Levy. Who is a CPA at JD, and a wonderful singer.
Steve Levy:
Well, thank you, Jarrod.
Jarrod Bridgeman:
That's right. We called him pipes, around the office. And not because he is a plumber. It's a singing pun. I don't know if you realize that.
Steve Levy:
Yes. I think I do.
Jarrod Bridgeman:
So the other day you came to me very excited, about a really cool topic that you wanted to discuss. And you have said that this is something that came to your mind because you were helping a client with it. Is that correct?
Steve Levy:
That's right. And I felt that it was important for really, everyone to know this. No matter what cycle portion they were in of their business, that you should always have an end in mind. And there were certain steps that if you didn't necessarily follow them or follow them in order, it could lead to some problems.
Jarrod Bridgeman:
So would this be... Would you say, winding down the business? These are steps you should make if you're going to transition out or sell your practice. That kind of thing?
Steve Levy:
That's right. Sometimes an asset sale, sometimes a stock sale. Sometimes you're just doing a succession plan to someone else. And you're wanting to close down the entity you started, and allow the successor to form their own entity. And take over the actual business.
Jarrod Bridgeman:
Okay. So I get it, but why is that so important?
Steve Levy:
Well, it's because you're a legal entity. And you're also an entity that pays payroll, and payroll taxes. As well as reports its income to the IRS. And if you don't wind things down and take certain steps, the state, the IRS, the state department of revenue, they're going to assume that you're still around. And so, they're going to still ask you for filings. Still assume you're still in existence. And will -
Jarrod Bridgeman:
So you can't just quit cold turkey?
Steve Levy:
That's right. Or else they're going to assume you're still around and go business as usual.
Jarrod Bridgeman:
And that's affecting the business side. That's not even going into your patients. If you just drop out, that can cause issues too.
Steve Levy:
Certainly. Legal issues especially.
Jarrod Bridgeman:
Is there a general guideline or a checklist that could help somebody with that?
Steve Levy:
There's lots of advice out there, on the internet. I'd say, there's generally five steps that people should follow. And the first one, since you're not going to be paying compensation any longer, you should notify your payroll provider of that. And they can help you with various wind-down activities, for payroll-related filings.
Jarrod Bridgeman:
But since this is their business, you just let them know your plan, and they'll help you get it?
Steve Levy:
Absolutely. Yeah. Certainly.
Jarrod Bridgeman:
And when should they... What information should you tell them upfront?
Steve Levy:
Your payroll provider?
Jarrod Bridgeman:
Mm-hmm.
Steve Levy:
Basically, the last day that you're going to be paying compensation. Because that will be the cutoff point for any future filings. That should be... Let's say your last payroll was June 30th, and that's the end of the quarter. You shouldn't need to file any third or fourth quarter payroll filings after that, since -
Jarrod Bridgeman:
Okay.
Steve Levy:
That should be it.
Jarrod Bridgeman:
How far out in advance, do you need to let them know this?
Steve Levy:
Really, as soon as you know when the last salary or other compensation is going to be paid.
Jarrod Bridgeman:
Just in case of any human error issues or anything else, it's better to let them know earlier.
Steve Levy:
Yeah. It will. Because then, they can work with you with any information they may need, to do all the wind-down procedures. And sometimes, because of different states' rules, they can't necessarily do certain steps. You may have to do that. For instance, with unemployment, that might be something you have to wind down yourself. Or even state taxation, that might be something you have to take care of. But it depends on the state.
Jarrod Bridgeman:
So that's step one, correct?
Steve Levy:
That's step one.
Jarrod Bridgeman:
What's step two?
Steve Levy:
Step two is filing your final returns. Both federal, and state. If you don't mark final... And usually, there's an area to save final on both federal and state. If you don't do that, then like I said, they're going to expect you to still have to file... We're talking income tax returns. They're going to expect you to have to continue to file those. And if you don't, you could get penalties.
Jarrod Bridgeman:
Penalties for something you're not even doing?
Steve Levy:
Right.
Jarrod Bridgeman:
Yeah.
Steve Levy:
That you don't exist anymore. Hey, I'm not around. But they don't know that.
Jarrod Bridgeman:
If that does happen, is there a way... I'm assuming it's just more forms to fill out. But to retroactively then be like, no. This was my end date? Or is it... You're just stuck?
Steve Levy:
It might be an amended return, that costs money to file. Where you just do an amended return saying, final. You can also notify the IRS or state revenue authorities that, hey, I'm really not in existence anymore. Can you just take care of it? Based on the conversation I'm having with you.
Jarrod Bridgeman:
Okay. And that would be when you follow those final returns, when would that happen?
Steve Levy:
That would happen generally... From the date that you're going to say you're closed, generally two and a half months from that date. No matter when it is in the year.
Jarrod Bridgeman:
So this isn't a wait until tax -
Steve Levy:
The end of the year. Right. If you're closing on June 30th, then you're going to have September 15th. Now you can file extensions to extend that out, but you need to file that extension by September 15th.
Jarrod Bridgeman:
Okay.
Steve Levy:
To extend that due date.
Jarrod Bridgeman:
After returns are filed, or at least you have it marked down to, it needs to be... Put it in your calendar, filed by this date.
Steve Levy:
Certainly.
Jarrod Bridgeman:
I know there are some things with EINs, and having different kinds of business accounts. What your suggestion with that?
Steve Levy:
Yeah. So you should close your IRS business account, and cancel your EIN. With the environment that we live in nowadays, your EIN can be taken by someone else. You certainly don't want -
Jarrod Bridgeman:
Like identity theft?
Steve Levy:
Identity theft. Absolutely. You certainly don't want someone else getting their hands on your EIN when your business is closed. So notifying the IRS... And there's a great website for that. Notifying the IRS that your business account is closed, and canceling your EIN is just a great idea for certainly, fraud prevention.
Jarrod Bridgeman:
Perfect. Yeah. I mean obviously, that's not something you want. Because that's tied to you personally as well.
Steve Levy:
It is. And if someone starts using that EIN, then things that they're doing and maybe doing wrong could be coming back to you. And maybe some liability on you. Which is horrible.
Jarrod Bridgeman:
What would be... What's another step that needs to be done? And we've got three covered so far.
Steve Levy:
Three covered. And there's generally five. Now, we're looking at more of the legal stuff. So we've told the tax authorities, hey, we're done. So now, it's time to move on to the legal stuff. So when you started your entity, you generally formed some sort of articles of incorporation. Or articles of organization, if you're an LLC. Well, now it's time to tell the state, especially the secretary of state, hey, I'm done. And generally, you can do this via online. There's an online notice of disillusion, with the secretary of state. It's a small fee that you can tell them, hey, I'm done as a legal entity. And don't come after me for, generally the annual filings. And it puts everyone on notice, that you're done as a legal entity as well.
Jarrod Bridgeman:
Is this something that needs to be done after your last day? Or because you're filing a notice, you would put your end date on the file?
Steve Levy:
You would put your end date.
Jarrod Bridgeman:
Okay.
Steve Levy:
But I would suggest that those prior steps be done, before this one. Because once you're done with a legal entity, you're essentially not in existence anymore.
Jarrod Bridgeman:
Got it. Okay. So obviously you still have your bank accounts.
Steve Levy:
You do.
Jarrod Bridgeman:
Your business bank accounts. What happens with those?
Steve Levy:
Well, it's time to get the money out in some way. You certainly don't want that sticking around any longer. And the final two steps are generally done in tandem. Because as you're no longer a legal entity, you no longer should have any assets or any kind of cash in those accounts. So it's time to take it out as a distribution.
Jarrod Bridgeman:
So it's like distribution to pay yourself?
Steve Levy:
Not necessarily. Like compensation, or anything like that.
Jarrod Bridgeman:
Okay.
Steve Levy:
Just an owner distribution to yourself. And certainly closing your bank account also, or there's fees if you keep that open. But you want to really be sure when you're really closing your business. Sometimes people will have an asset sale, and will also stop paying their employees. But they may be being paid maybe for the next... Or for the buyer as an independent contractor. And being able to pay that through the entity. So sometimes when you've really closed, you're not really closed. So you want to be sure, okay? I'm really done with this thing, and I'm going to wind it all the way down.
Jarrod Bridgeman:
Okay. So out of these five steps, are these basically in order? Or is there a certain order -
Steve Levy:
Yeah. I would follow the order. So contacting your payroll provider, filing your final returns. Closing your IRS business account, and canceling your EIN. The fourth, of notice of disillusion. You're done legally. And then in tandem with taking all the money out, and closing your business account. That's really the general order. Because let's say you filed with secretary of state, saying you're no longer a legal entity. Well, now you've got an issue that, that entity's done and who's on the hook for providing payroll records? That's why we get entities in the first place, is to insulate ourselves personally from that kind of liability. So if you've already canceled that entity and something happens in the business as you're winding down, it's going to come on you. So that's really... The legal winding down is certainly great to really push towards the very end.
Jarrod Bridgeman:
You've touched upon this a couple times so far, but what happens if these steps aren't taken? Is there... What's a worst-case scenario?
Steve Levy:
Worst case scenario is that you've got filings that you haven't done, even though you've stopped compensation. We can go through each one. For not telling your payroll provider, they're going to keep assume... They're going to keep filing these filings for you, and not winding things down. Even though, you aren't in existence anymore. Not filing your final returns, the IRS and state are going to keep expecting you to keep filing. And then if you don't, you could get late penalties. Everything revolves around late penalties.
Jarrod Bridgeman:
Is that one of those things where you could show up and on your door, there's a note from the sheriff?
Steve Levy:
Yeah. Absolutely. Yeah. That's -
Jarrod Bridgeman:
That happened to me in my early twenties. My first time ever doing my own taxes, and I didn't realize there was a due date. Because they don't teach that in school.
Steve Levy:
Right. Certainly. Which everybody really, should learn that from the start.
Jarrod Bridgeman:
Yeah. At least the basics of it.
Steve Levy:
Yeah. Certainly. So that's with not filing your final returns. Not closing your EIN, that's again, back to the fraud situation. That's obviously, pretty rough. Not filing your notice of disillusion, you could still be on the hook legally. And people still might think you're in existence and get confused on that. Plus, secretary of state will also want these filings.
Now, they do have a fail-safe. If you stop filing your filings, even though you should, they administrative administratively dissolve you.
Jarrod Bridgeman:
Okay.
Steve Levy:
Which is also a danger. If you're supposed to be filing them but don't, they're going to dissolve you too. Then that creates its own headache, and you got to reinstate yourself.
Jarrod Bridgeman:
Right.
Steve Levy:
And prove that you don't owe taxes, to be able to do so. And that's a big headache. And then obviously, the end. Distributing funds. It's your money. And you certainly don't want that just lingering out there.
Jarrod Bridgeman:
Right.
Steve Levy:
Especially, since you no longer legally exist. So what are they going to be able to do with that money?
Jarrod Bridgeman:
Right.
Steve Levy:
They're not going to know what to do. So you might actually not get it, in some circumstances. Which would be a real shame.
Jarrod Bridgeman:
They sound easy enough when you just talk about it. Some of the stuff may not be that simple. Who are some people that should be helping someone looking to start winding down?
Steve Levy:
Well obviously, the payroll provider's the one that's going to help you with that. Again, they may not be able to help with everything, based on certain states. Filing final returns is the person that has been filing your returns throughout.
Jarrod Bridgeman:
Mm-hmm.
Steve Levy:
So they'll take care of that. Closing your IRS bank account and canceling your EIN, your CPA can also help with that. So that's not a difficult situation. The filing of notice of disillusion, that can be done by yourself. Generally, it could be done also by your lawyer.
Jarrod Bridgeman:
Okay.
Steve Levy:
Because they may have additional filings related to your entity.
Jarrod Bridgeman:
Right.
Steve Levy:
Or if you have multiple entities, then they'll be able to handle that complexity. So that's generally a legal thing. And then obviously distributing your money, that's on you to take the money out. And communicating with your bank. Hey, I'm no longer around. So that would be best for them.
Jarrod Bridgeman:
So how much of these steps do we take care of for our clients, when they're ready to move on?
Steve Levy:
Well certainly, we'll take care of the filings of the final tax returns. We would take care of... We can assist with the IRS business account. We can really help with everything.
Jarrod Bridgeman:
Okay.
Steve Levy:
So we recommend the payroll provider notification. We don't provide payroll ourselves, but we can file the final returns. We can help with the EIN closing. We're not lawyers as a practice, so we can't do the notice of disillusion. But it's relatively straightforward.
Jarrod Bridgeman:
Okay.
Steve Levy:
And obviously, you're on the hook for taking the money out.
Jarrod Bridgeman:
Well, That's great, because this is something that we provide to all our clients.
Steve Levy:
Mm-hmm.
Jarrod Bridgeman:
But you have to be a client of ours.
Steve Levy:
Yeah.
Jarrod Bridgeman:
You can't just call us up and be like, Hey. I need help. I'm winding my practice down.
Steve Levy:
Yeah. Because... There are... It can be complex. And these are the general steps too.
Jarrod Bridgeman:
Yeah.
Steve Levy:
They are little sub-steps certainly, within each of these items. Because what we do often is also look at the sale documents too, to see how they look from a tax perspective. Or just see if we see anything you should be aware of. So it goes broader. Not just these winding down steps but also looking at things as a whole. Which obviously is important to make sure you're dotting your Is, and crossing your Ts on it.
Jarrod Bridgeman:
Well all right, Steve. I thank you so much for coming in and bringing this topic to my attention. Was there anything else you felt like you needed to be said on this?
Steve Levy:
No. That's it. Just be aware. You can't just walk away from your business, without taking these steps.
Jarrod Bridgeman:
All right. Well if you're interested in meeting us at some point, or at least members of our team, we will be at several different events throughout the rest of the year. End of September, we will be in Schaumburg, Illinois at the Topgolf. Visit fourquadrantsadvisory.com/events. You can register for tickets on that. We will also be in Colorado, Springs later this fall. And we have some more events we will be announcing soon. Thanks Steve.
Steve Levy:
Thanks, Jarrod.
Announcer:
That's all the time we have today. Thank you to our guest for their insight, and for sharing some really great information. And thank you to you, the listener, for tuning in. The Millionaire Dentist podcast is brought to you by Four Quadrants Advisory. To see if they might be a good fit for you and your practice, go on over to fourquadrantsadvisory.com, and see why year after year, they retain over 95% of their clients. Thank you again for joining us, and we'll see you next time.
