1. How to Dissolve an S Corporation
2. Liquidation and Final Actions

Updated July 2, 2020:

Knowing how to close an S Corp correctly will ensure you dissolve your business legally. You'll have to do the following: 

  1. Obtain a shareholder vote to dissolve. 
  2. Stop conducting business. 
  3. Notify creditors. 
  4. Liquidate assets.
  5. File a certificate of termination. 
  6. File final government documents.

How to Dissolve an S Corporation

Check your state's business codes to make sure you comply with the necessary procedures to legally end the business.

Typically, your shareholders will have to vote to dissolve the S-Corp. The decision to dissolve the business has to be a majority vote. Some states only require a simple majority, while others call for a supermajority or something else, like a two-thirds majority. If your corporation's bylaws specify a higher maximum, you'll have to follow the bylaws.

Stop doing business on behalf of the S-Corp. Instead, managers should focus on procedures to legally dissolve the business and liquidate assets. You can still engage in any transactions and communication related to closing the business.

The S-Corp isn't exempt from any legal proceedings that were in place before the dissolution process. You'll have to notify all creditors with pending claims against the S-Corp that you are closing your business. Do this in writing.

Liquidation and Final Actions

Liquidation involves the distribution and sale of business assets and property. Proceeds of distribution and sale go toward paying off any outstanding obligations and debts. In many states, creditors have first rights to claim sale proceeds in order to settle debts. Others eligible to receive proceeds include company members and owners.

After creditors are paid, any remaining assets should be distributed among shareholders. Refer to the corporate bylaws to see how much each shareholder receives, based on ownership percentage. If your bylaws don't specify this, distribute according to the default rules in your state.

In most cases, a business with at least 100 employees must give them sufficient notice that it's dissolving; the typical time frame is a minimum 60 calendar days advance notice, no matter what type of business you run.

Issue final W-2s to company employees, as well as 1099 forms to any independent contractors.

Issue final K-1 statements to shareholders, and be sure to check "Final K-1" on the form. Send copies of all these forms to the IRS, along with the S-Corp's final income tax return.

Submit a certificate of termination to the appropriate state agency. You must make sure to settle outstanding tax and state income obligations, along with any unpaid taxes. Getting clearance from your state's finance departments is often required to legally dissolve your business.

Take care of final tax documents by filing the appropriate paperwork with the IRS. This includes Form 966, and you must file it within 30 days of dissolution and liquidation. You must include the following on Form 966:

  • S-Corp name 
  • S-Corp address 
  • Incorporation date

If you conducted business in other states as a foreign corporation, you'll have to file dissolution paperwork in those jurisdictions, too.

Depending on local and state law, you may be required to cancel any permits or licenses the S-Corp held. You must also do the following (this applies to all types of businesses): 

  • Cancel any registrations you had with local government.
  • Close business bank accounts.
  • Cancel business credit cards. 
  • Close your Employer ID account with the IRS.

Check the "Final Return" box at the top of all returns so that the IRS is aware that you're dissolving your business. Any business property that's disposed of when you dissolve your S-Corp must be reported to the IRS using Form 4797. You'll attach this form to the business's final tax return.

Finally, notify the IRS in writing with contact information for the person who's responsible for payroll records for the company. Include that person's name, address, and telephone number. The IRS may contact this individual once the business is dissolved if any issues come up related to deposits, returns, or employment taxes.

While it may seem easiest to simply stop conducting business, that's not the legal way to terminate an S-Corp. You'll have to follow several steps to end the business properly, so make sure you adhere to all state regulations and guidelines to avoid any future legal hassles.

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