How To Close as Corporation: Everything You Need to Know
Once the board of directors approves the resolution, shareholders vote on it. You should make sure all of these actions are documented and recorded.3 min read
2. Taxes, Creditors, and Asset Distribution
How to close a corporation involves the following steps:
- Vote to dissolve the business.
- File a Certificate of Dissolution.
- File tax forms.
- Notify creditors.
- Settle creditor claims.
- Distribute assets.
- Close accounts.
How to Close a Corporation
Before you can close your corporation, company owners — or shareholders — must approve this decision. Your corporation bylaws should outline the necessary approval and dissolution process. The board of directors will be responsible for drafting and approving the dissolution resolution.
Once the board of directors approves the resolution, shareholders vote on it. You should make sure all of these actions are documented and recorded.
State law will usually outline the minimum number of director and shareholder votes needed to dissolve a company. Some states require a simple majority, but others call for a supermajority, or something like two-thirds to pass the resolution. If your corporation's bylaws set a higher minimum, follow the bylaws.
Next, you'll file paperwork with the state. If your corporation conducted business in multiple states as a foreign corporation, you'll have to file dissolution paperwork in those jurisdictions as well.
Each state may have slightly different procedures for filing an Articles of Dissolution, also known as a Certificate of Dissolution. Some states require you to file and then notify creditors to resolve claims, while others require creditor notification to take place before filing.
In some states, you'll also be required to clear all corporate taxes before you can dissolve your company. You'll have to pay any back taxes first.
You'll stop doing business as a corporation, except to notify creditors of the impending dissolution, pay them, and distribute assets. This is often referred to as "winding up.”
Taxes, Creditors, and Asset Distribution
Tax obligations don't immediately end because your business is closing. You'll file a final corporate tax return with the IRS and state tax authorities. Check the “final return” box to let them know this is your final tax return, and pay any outstanding taxes. You'll prepare and distribute Schedule K-1s to all company shareholders, and make final payments to any subcontractors. Provide final wage and withholding information to all employees.
You might want to refer to the IRS website, which includes a business closing checklist. This tells you which forms are required and gives you links to check for additional local and state requirements.
You may have some permits or licenses to cancel, and you'll have to file Form 966 with the IRS. You might also have to place a dissolution notice in the local newspaper.
You'll have to notify all of your corporation's creditors in writing that your company is dissolving. You must provide them with the following:
- A mailing address for them to send claims
- A list of information to include in claims
- A deadline to submit claims
- Notice that claims will be barred if received after the deadline
You can either accept or reject creditor claims. If you accept them, you must pay them or make arrangements to pay. If you reject a claim, put it in writing. Know what your state's statutes are regarding rejecting claims.
After settling all claims, you may then distribute remaining assets to owners/shareholders based on their ownership percentage. Company bylaws should specify this. For instance, if you own 70 percent of the business and your partner owns 30 percent, you'll receive 70 percent of the remaining assets. You must report distributions to the IRS.
If your bylaws don't specify how to distribute assets, you'll have to follow your state's default rules. Usually, state law dictates that shareholders receive assets in proportion to their ownership percentage. If a shareholder loaned money to the corporation, he or she is considered a corporate creditor. Therefore, he or she should be paid before remaining assets are distributed.
Close all credit lines, bank accounts, and service accounts that your corporation held, and notify your vendors and customers that your corporation is ending.
Because dissolving a corporation can be complicated, you might want to consult with an attorney and/or tax professional to make sure you meet all state and federal guidelines. It's not enough to simply close up shop and stop doing business. If you don't dissolve your company properly, you run the risk of costly legal consequences.
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