Key Takeaways

  • Dissolving an S corporation involves legal, administrative, and tax-related steps.
  • Unanimous or supermajority shareholder approval is generally required.
  • Notifying creditors and settling all claims is essential to limit liability.
  • Asset distribution must follow IRS and state guidelines, with potential tax consequences.
  • Final federal and state tax filings must be completed, including Form 966 and Form 1120-S.
  • You may need to cancel business licenses and obtain tax clearance in certain states.
  • Failure to dissolve properly can lead to penalties or continued tax obligations.
  • Legal and tax professionals can help ensure compliance throughout the process.

Knowing how to dissolve an S corp involves several key steps, including the following: 

  1. Vote to dissolve the corporation.
  2. Stop conducting business.
  3. Notify creditors.
  4. Liquidate assets.
  5. Settle claims.
  6. File a termination certificate.
  7. Finalize corporation taxes.
  8. Pay final expenses.

Steps to Dissolve an S Corporation

With the exception of certain tax issues, dissolving an S corp is pretty much the same as dissolving any corporation. You must adhere to the laws in your state since state business codes outline the specific procedures that corporate managers must follow to legally dissolve the S corp.

It will take several steps to dissolve the business, and it can be stressful. Just because you stop business operations doesn't mean the business is dissolved. You can certainly dissolve it that way, but it's not the best option since it can open you up to liability and possible lawsuits.

Take a Vote and Stop Doing Business

Most states require an S corp's managing parties to start dissolution procedures, but only after shareholders authorize it. You may need a shareholder supermajority even if your bylaws only call for a simple majority. A supermajority could be up to two-thirds of outstanding shares.

The board of directors will draw up the resolution for dissolution. Shareholders vote on the resolution.

Next, stop doing business as the S corp. The manager's focus should be on legally dissolving the business and no longer on running the company. You should limit any business activity to necessary transactions and communications for dissolving the business.

Review State-Specific Requirements Before Starting

Each state has its own dissolution laws, and understanding these is crucial before moving forward. For instance, some states require entities to obtain a tax clearance or certificate of good standing before filing articles of dissolution. Others may mandate publishing a notice of dissolution in a local newspaper or notifying the Secretary of State before ceasing operations.

Review your S corp’s articles of incorporation and bylaws for internal rules about dissolution, such as required vote thresholds or additional procedural steps.

A few examples:

  • California: Requires corporations to file both a Certificate of Dissolution and a Certificate of Election to Wind Up and Dissolve.
  • New York: May require clearance from the Department of Taxation and Finance before acceptance of dissolution.
  • Delaware: Requires all franchise taxes to be paid before filing the Certificate of Dissolution.

Notification of Dissolution and Liquidation

You typically have to inform any creditors with pending claims against the business that it's dissolving. You might also have to place a notice in your local newspaper.

In the liquidation process, you'll distribute and sell property and other business assets. Company owners may receive any remaining assets in proportion to their ownership share. For example, an owner with 75 percent of shares in the company will get 75 percent of the assets, while an owner with a 25 percent share receives 25 percent of the assets.

You must use any proceeds from the sale of property to pay outstanding debts. You must pay creditors, including employees, before the dissolution is complete. You have to do this even if the due date for debts is after the dissolution date.

You must report distributions to the IRS.

Cancel Permits, Licenses, and Business Registrations

Once dissolution is initiated, it's important to cancel any business licenses, seller’s permits, and registrations your S corp may have in its home state or any other states where it operated. This prevents future tax obligations and fees associated with inactive business registrations.

Some common items to cancel include:

  • State business licenses
  • Sales tax permits
  • Employer identification numbers (after IRS obligations are fulfilled)
  • Professional or industry-specific licenses
  • Out-of-state registrations (foreign qualifications)

Not doing so can result in ongoing tax bills or late fees from regulatory agencies—even after the business has closed.

Handle Outstanding Loans and Lease Agreements

Before your S corporation can officially terminate, all financial obligations must be addressed. This includes:

  • Paying off outstanding business loans
  • Negotiating early termination or assignment of lease agreements
  • Settling vendor contracts or subscription services

Failing to properly settle these liabilities may expose shareholders or officers to legal action or damage the business’s credit profile.

If certain liabilities cannot be paid in full, you may need to work with creditors to arrange settlements or document the unpaid balance. 

Settling Claims and Filing a Certificate of Termination

Your company can accept or reject creditor claims. If you accept them, you either pay them or make arrangements for repayment. If you reject them, you must notify creditors of that in writing.

File an Articles of Dissolution or certificate of termination with the appropriate state agency. In your termination document, you'll state your intent to dissolve so that the state can make it public.

If the S corp conducted business in other states, you'll have to file the appropriate paperwork in those states as well. Depending on the state, you may have to file documents before notifying creditors, but in others, you'll notify and resolve claims after filing.

Your state may also require your S corp to have tax clearance before filing termination paperwork. It's a common requirement to be cleared by the state's finance departments before being legally able to dissolve a business.

Filing Tax Forms and Paying Final Expenses

You'll have to formalize the business closing with the following: 

  • IRS
  • Local tax agency
  • State tax agency

You must file Form 966 with the IRS. You have 30 days to do so after dissolving and liquidating the S corp. You must also file Schedule K-1 with the IRS. Each shareholder must receive an individualized version of the form.

After dissolution, you have three months to file a final tax return on Form 1120S.

If you have employees, you'll have to finalize payroll. Also, someone will need to send out W-2s and 1099s if you had any independent contractors do business for you. You'll typically have some other final expenses, including accountant and attorney charges.

While the dissolution process may be similar from state to state, each jurisdiction may have its own rules and regulations. You'll have to be familiar with what your state (or the state where the S corp was doing business in) requires. It's often helpful to consult with a lawyer and/or a tax professional to make sure you meet all requirements.

Understand Tax Consequences of Dissolution

Dissolving an S corporation can result in tax implications for both the business and its shareholders. The IRS treats dissolution as a taxable event, and assets distributed to shareholders must be reported.

Here are key tax considerations:

  • Capital Gains Recognition: If appreciated assets are sold or distributed, the corporation may recognize capital gains, which pass through to shareholders via Schedule K-1.
  • Shareholder Basis Adjustment: Distributions impact the basis of each shareholder's stock. Excess distributions over basis may trigger capital gains on the individual’s tax return.
  • Final Payroll Filings: Ensure all final payroll taxes, W-2s, and 1099s are filed and submitted.
  • State Tax Filing: Some states require a separate final return or specific dissolution paperwork for tax clearance.

Timely and accurate filing of Form 966 (Corporate Dissolution or Liquidation) and the final Form 1120-S return is critical to avoid IRS penalties. 

Frequently Asked Questions

  1. How long does it take to dissolve an S corp?
    The timeline varies by state and complexity but typically takes several weeks to a few months, depending on how quickly obligations are settled and filings are processed.
  2. Do I need to notify the IRS when dissolving an S corp?
    Yes. You must file IRS Form 966 within 30 days of the resolution to dissolve and include the final Form 1120-S and Schedule K-1s for shareholders.
  3. What happens if I don’t dissolve my S corp properly?
    You may remain liable for taxes, annual report fees, and state penalties. Improper dissolution can also expose you to legal risks from creditors.
  4. Can I dissolve my S corp if I have outstanding debts?
    Yes, but you must address those debts during the dissolution process—either by paying them, negotiating settlements, or formally notifying creditors of non-payment.
  5. Is it necessary to hire a lawyer to dissolve an S corp?
    While not legally required, legal and tax professionals can help ensure compliance, especially when navigating multi-state operations, complex tax issues, or shareholder disputes.

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