S Corporation Dissolution: Everything You Need to Know
S corporation dissolution is the process of legally dissolving an S corp. Depending on your state, you will need to follow various guidelines and procedures.3 min read updated on February 01, 2023
S corporation dissolution is the process of legally dissolving an S corp. Depending on your state, you will need to follow various guidelines and procedures to dissolve your S corporation. If you have decided to cease operations, you will need to properly terminate your S corporation's legal status; it is more than just packing up your things. By following the appropriate steps, including the completion of your articles of dissolution, you can also ensure that all outstanding debts and taxes are paid in full.
The Dissolution of an S Corp
Regulated as a corporate entity under state law, an S corporation benefits from pass-through taxation. When planning to dissolve or liquidate your S corporation, you must do so under the laws of the state in which your corporation was registered to operate in.
Based on state business codes, corporations must follow strict guidelines when planning to legally terminate or liquidate the company. Just as you filed specific documentation in order to form your business, you will also need to complete the appropriate documentation to formally close the corporation. In fact, in some cases, dissolution of an S corporation is more complicated than initially forming the company.
Closing down your company requires more than simply shutting down all operations. This is particularly true if you formed an S corporation. Generally, you will need to file paperwork with the same agencies you worked with when you first formed your business. After you have filed the appropriate documentation, you will then need to liquidate your business assets and pay all outstanding debts.
Steps to Dissolving an S Corp
A corporate resolution must be completed during a board of directors meeting. In order to go ahead with S corporation dissolution, you will need to follow the laws proposed by the state in which your company was formed. Once this step is approved by the board of directors, 66 percent of the shareholders must approve.
Once an agreement is reached and minutes are recorded, you will need to file articles of dissolution. In this documentation, you will need to state your intent to dissolve. In your statement, you will need to present specific information, including the name of your corporation, the date of dissolution, and the shareholder approval. This statement will then need to be signed.
Please note that just because you decide to end operations, that does not mean your tax obligations will immediately cease. You will need to formally close your business with the IRS. To do so, file Form 966 to dissolve your corporation. This form must be filed 30 days after you formally adopt your company's resolution to dissolve.
It is important that you follow a thorough checklist, completing all of the associated dissolution tasks. For example, you will need to notify all of your corporation's current creditors by mail, explaining that your corporation will be dissolved. You must also provide a reliable mailing address, in addition to information related to any claims. Also, be sure that all of your claims and debts are resolved before you distribute any remaining assets. In some cases, you may need to liquidate assets in order to pay debts.
If your corporation's debts exceed your current available assets, shareholders will be protected. If you do have assets to distribute, they will be divided based on ownership interest. For example, if you own 50 percent of the company, you will typically receive 50 percent of the remaining assets. These values will then need to be reported to the IRS on your individual tax return. You must also file the final income tax return for your S corporation within three months of your company's dissolution.
Depending on your state and business structure, this process can be highly complicated and time-consuming. When you first initiate this process of dissolution, it is imperative that you plan ahead. Understand all of your requirements so that all deadlines are met and that each step is completed legally. Planning is particularly important in regards to outstanding taxation, creditor claims, and all remaining company assets. If at any point in time you are unsure about the next step, seek professional assistance.
If you need help with 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.