Dissolving an S Corp: Everything You Need to Know
Dissolving an S Corp requires several steps, including stopping business operations and liquidating assets.3 min read
Dissolving an S Corp requires several steps, including stopping business operations and liquidating assets. It's also important to understand how an S Corporation is structured before dissolving the business because it is regulated as a corporate entity under state law despite its pass-through taxation status. As such, dissolving an S Corporation must be done according to the laws of the state.
How to Dissolve an S Corporation
State codes differ on dissolution procedures for S Corporations, but managers must follow them exactly to legally terminate the business and liquid assets. You must also follow all dissolution guidelines stated in your own company's Articles of Incorporation, which were determined when the business was established.
Failing to dissolve your S Corporation leaves you responsible for taxes and filing fees.
Getting Approval to Dissolve an S Corporation
In general, you cannot dissolve a business with S Corp status without the approval of shareholders or the board of directors. Approval must come from shareholder and director resolutions, which must be recorded in official corporate records. The resolution must also name those responsible for liquidating the business's assets.
For exact procedures required to approve a dissolution, refer to your state laws, corporate bylaws, and Articles of Incorporation. If any of these sources conflict, state law always takes precedence.
Your state may require a “super-majority” of the company shareholders to approve the dissolution, which means two-thirds of shareholders must agree. Hold a shareholders' meeting to vote on the decision and receive authorization. Just be sure to document the event in writing and file it with the Secretary of State in which you formed the business.
To comply with corporate formalities, have the board of directors draft and approve the dissolution resolution before shareholders vote on the matter. State laws require managing parties to initiate the dissolution procedures only after getting the go-ahead from shareholders.
Articles of Dissolution
You must file Articles of Dissolution when dissolving an S Corp. This is a notice of intent to dissolve the business, which alerts the state of your intentions. The Articles of Dissolution states your intent to dissolve so it can be published and creditors can make claims against company assets, if applicable.
Additionally, you may need to list the names and contact information of directors, officers, and receivers when filing your Articles of Dissolution. File all paperwork with the state after members or shareholders have voted on the dissolution. If the company conducts business in other states, you should also file paperwork in those locations, as well.
The process for filing the Articles of Dissolution (also called Certificate of Dissolution) varies by state; some require you to file before resolving claims and notifying creditors, while others require you to file after doing so. Some states also require tax clearance before filing, meaning that any owed back-taxes are paid in full.
Dealing With Debts and Assets in an S-Corp Dissolution
You must pay corporate debts before distributing assets and dissolving the business. Normally, you would notify creditors of your intent to dissolve and set a deadline by which they can assert claims. Remember, you must pay creditors, including your employees, before completing an S Corp dissolution. This is true even if certain debts are not due until after the dissolution date.
The business may need to liquidate assets to pay debts. When this occurs, shareholders only receive fund distributions from existing assets after the remaining corporate debts are paid. Fortunately, if the company's debts exceed its assets, shareholders are protected from these excess debts thanks to limited liability protection.
Be sure to notify all creditors with pending claims about the company's decision to dissolve. Doing so helps identify claimants of any proceeds from the company's liquidation. The Small Business Administration recommends consulting with an accountant, insurers, and an attorney to make sure you've covered your bases. If you have trouble paying all company debts, you may need to file for bankruptcy.
Dealing With Taxes When Dissolving an S Corp
- File one last Form 1120S before dissolving your business.
- You must also file a final state tax return.
- If the S Corp conducts business in other states, be sure to file tax returns in those states.
- A dissolving S Corp must also file Schedule K-1 (Form 1065) and hand out individualized versions of this form to every shareholder. Since S Corporations are pass-through entities, you probably don't owe federal income taxes. Still, shareholders will owe taxes on their own corporate profits.
If you need help dissolving an S Corp, post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.