1. Obtain Shareholders Approval
2. Notify and Pay Creditors
3. Distribute Assets to Shareholders
4. Finalize Taxes 
5. Create and File Articles of Dissolution 

The S corp dissolution process is identical to other corporation types. However, it does vary between the different states. It is important to adhere to the relevant laws in the state where the S corporation was registered to operate. 

The key steps to dissolve an S corporation are:

  1. Obtain shareholder's approval.
  2. Notify and pay creditors.
  3. Distribute assets to shareholders.
  4. Finalize taxes.
  5. Create and file articles of dissolution.

Obtain Shareholders Approval

The first step to initiate the dissolution process for an S corporation is to obtain approval. The decision must be raised to the corporation's shareholders. The dissolution process cannot commence until its directors and shareholders have approved the decision. 

Upon approval, this must be recorded in corporate records as a resolution. Most states require a "super-majority" approval, which refers to the situation where at least two-thirds of the shareholders have approved the decision. 

Notify and Pay Creditors

The corporation's creditors must be notified of the corporation's intent to dissolve. The notice should:

  • State the postal address where claims can be sent. 
  • Provide a time frame for when claims can be raised. 

Generally, creditors will have 120 days to file a claim. Once a creditor has raised a claim, the corporation must accept or reject the claim. If the claim has been accepted, the debt must be paid. 

The dissolution cannot be finalized until all creditors (including employees) are paid. If the corporation cannot pay its debts, assets may need to be liquidated to pay the remaining debts. Liquidation refers to the process of selling the corporation's assets. However, if the debt exceeds the value of the assets, shareholders would be protected from the debts due to limited liability

Distribute Assets to Shareholders

All corporate debts must be paid before assets can be distributed. Shareholders will receive the proportion of funds or assets remaining based on their shareholding percentage. 

Finalize Taxes 

There are a number of documents that must be filed before the S corporation dissolution is finalized. If a form is marked as "final," this communicates to the IRS the S corporation is closing. 

This list contains some of the key tax-related forms that must be completed:

  • Final Form 1120S — The form must state the final state tax return and be filed within three months after the resolution date.
  • Final W-2 Form — This must be submitted to the Social Security Administration. 
  • Schedule K-1 — This form must be filed with the IRS and provided to each shareholder. It must be marked with "Final K-1" at the top of the form.
  • Form 966 — This form must be filed with the IRS within 30 days of the dissolution resolution. It may also have to be filed with the appropriate state tax authorities. 

If the corporation operates in other states in addition to the state of incorporation, a final tax return must be filed in each state. All outstanding state income or privilege tax obligations for the previous operating year and all unpaid taxes must be settled.

For more information, refer to the business closing checklist on the IRS website, which includes all the required forms and links to state and local requirements. 

Create and File Articles of Dissolution 

The articles of dissolution must be filed with the secretary of state. Refer to state law, articles of incorporation, and corporate bylaws to understand the required articles for dissolution. If there are discrepancies in information among the different sources, state law will take precedence over the other sources. 

A key document is the Statement of Intent to Dissolve, which should contain the following information:

  • Corporation name
  • Dissolution authorization date
  • Statement that the shareholders approved the dissolution
  • Statement that a notice will be published

The articles must also acknowledge that shareholders have received their respective distributions, and there are no court proceedings pending against the corporation. 

All business operations must cease once the S corporation dissolution process has commenced. However, this does not prevent managers from dissolving the business and liquidating assets in a timely manner. This may also extend to communications or transactions necessary to complete the dissolution of the business. For example, if there are pending administrative or legal proceedings that predate the start of the dissolution process, they will still need to be resolved.

It is critical that the dissolution process is strictly followed according to the state rules and regulations. If you need help with an S corporation dissolution, you can 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.