Closing an S Corporation: Everything You Need to Know
Closing an S corporation requires official dissolution with the Secretary of State where your business operates. Laws for dissolution vary by state.3 min read
Closing an S corporation requires official dissolution with the Secretary of State where your business operates. A corporation is an independent legal entity that is responsible for taxes and other filings until it is officially dissolved, even if it is no longer doing business in the state. While laws for dissolution vary by state, the procedure is usually similar.
Directors and shareholders must vote to pass a resolution that authorizes the dissolution of an S corporation. This requires documentation of a formal meeting even for corporations made up of only one shareholder.
The minimum number of directors and shareholders that must pass the dissolution resolution is dictated by state law. This could be a simple majority, though some states require a larger majority, such as two-thirds of eligible directors or voting shares. When corporate bylaws state a specific minimum, this number must be used.
Closing an S corporation simply requires adherence to the dissolution guidelines outlined in your Articles of Incorporation. In most states, an S corporation requires shareholder authorization to dissolve. Regardless of the steps taken to dissolve the company, they must be documented and filed in writing with the Secretary of State in all states where you are registered to do business.
Dealing with Creditors
After the resolution to dissolve your S corporation has been approved, you must cease all business operations. The exception is creditor notification of the upcoming distribution. You must also pay your creditors, then distribute assets that remain to shareholders if applicable. This is known as the winding-up process. Other steps of this process include:
- Filing corporate income tax returns with both the IRS and state taxation authorities. These should be noted as the final tax return and all unpaid taxes should be resolved.
- Create and distribute a Schedule K-1 to each shareholder.
- Provide subcontractors with final payment information.
- Provide employees with final withholding and wage information where applicable.
If you cannot pay all your business's outstanding debts, you may need to consider bankruptcy proceedings. For this reason, it's important to notify your creditors so liquidated company assets can be appropriately distributed.
Distributing Assets to Shareholders
When distributing remaining assets after repaying creditors, consult the corporate bylaws to determine the percentage each shareholder should receive. If this is not detailed in the bylaws, follow the state laws for distribution. These typically require distributions to be in accordance with each shareholder's percentage of the company. Shareholders who are also creditors should be repaid before any assets are distributed.
State and Federal Filings
In most states, you'll need to file Articles of Dissolution to officially dissolve your S corporation, though some states call this paperwork by a different name. Certain states require that you first settle any outstanding tax obligations and provide the state with a tax clearance certificate along with your filing.
S corporations that are dissolving must also file IRS Form 966 and cancel any outstanding state and municipal licenses and permits. You must file a certificate of termination with the finance department in the state where your S corp is registered.
Form 966 must be submitted within 30 days of the corporation resolution for S corp dissolution and liquidation. This form will require information such as your company's name, address, and date of incorporation.
The S corp's final income tax return must be submitted within three months of the dissolution date using Form 1120S. You'll also need to submit Form 4797 if you gave away or donated any business assets as part of the wrapping-up process.
Your state law will dictate how much time you have to issue final paychecks to your employees. You must pay all final payroll taxes or risk being held personally liable by the IRS. Employers with more than 100 employees must also give at least 60 days written notice of the business's closing. Giving notice to employees is good policy for all companies to follow, even those with only a few workers.
In addition to final paychecks, you must issue final W-2 forms to employees and final 1099-MISC forms to independent contractors. These should also be sent to the Social Security Administration.
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