How To Dissolve an S Corp: Everything You Need to Know
With the exception of certain tax issues, dissolving an S corp is pretty much the same as dissolving any corporation. 3 min read
Knowing how to dissolve an S corp involves several key steps, including the following:
- Vote to dissolve the corporation.
- Stop conducting business.
- Notify creditors.
- Liquidate assets.
- Settle claims.
- File a termination certificate.
- Finalize corporation taxes.
- 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.
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.
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:
- 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.
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