How to Dissolve S Corp: Easy Tips to Stay Tax Compliant

An S corporation is a type of corporate business structure governed by Subchapter S of Chapter 1 of Title 26 of the United States Code. It limits the liability of its owners and provides for pass-through taxation, just like a partnership or sole proprietorship does.

In order to form an S corporation, a formal agreement must be written and filed with the Secretary of State where the corporation was formed. An S corporation may also be approved to do business in other states if it follows those state’s requirements for doing so.

Ways of dissolution

There are many different ways that an S corporation can be “dissolved” as defined by Section 1362(a)of the Internal Revenue Code:

  • For lack of directors or voting members of a corporation, or
  • For failure to file a return, or
  • For failure to pay employment taxes, penalty, interest, fine, fee, etc., required by federal law

Social security administration: A corporation’s employees and its successor’s employees no longer have a social security entitlement for work performed after the dissolution is complete.

How to Dissolve an S Corporation

Step 1. Decide to dissolve the corporation

  1. Open your Articles of Incorporation and check for any provisions that indicate a time or event when you need to get a vote from all shareholders on dissolving the corporation.
  2. Generally, if there is no such language present in your articles of incorporation, S corporations can be dissolved by unanimous approval of its shareholders without going through the extra cost and time it takes for court proceedings to dissolve a business entity.
  3. In most cases, it is better to practice getting a vote from shareholders before filing any dissolution paperwork with the Secretary of State’s office to ensure that all shareholders agree on their decision.
  4. If there is specific language in your articles requiring this then this article will not help you and you should consult an attorney who is qualified to handle your specific legal situation.
  5. In many cases, it will not matter since the corporation has over $10 million in assets and will automatically be required to go through a court dissolution if no vote is present from shareholders within a specified time period.

Step 2. Decide how to pay off debts

1) If the S corporation owes any other parties money then you need to determine who these people are and whether or not they have a secured interest in any of your company’s property.

For example, if your Corporation holds a note from another party that is secured by one or more of your properties then those creditors will likely have first dibs on those properties as repayment for their loan to the business entity.

2) If there are any non-secured debts then these will be treated like any other debt and the shareholders of the corporation will need to agree on how to pay them.

3) If you do not have enough money within your remaining corporate assets to completely pay off all non-secured creditors then you may need to look into filing bankruptcy or sell your remaining S corporation assets in order to raise that much-needed capital.

Step 3. Determine if there are any liquidation preferences

If there are liquidation preferences associated with particular shares of stock, then these will need to be removed before the actual dissolution paperwork is filed by the business entity since they may complicate matters during liquidation proceedings which can greatly slow down this process even further.

To avoid this slowdown, make sure every shareholder has an equal number of shares and that there are no outstanding liquidation preferences associated with any specific shares of stock.

Step 4. Obtain a dissolution date

After you have decided on how to pay off debts and removed all liquidation preferences, then you need to determine an actual final dissolution date for your corporation’s legal existence. This means the day the business entity stops legally existing and will be filed as such with all pertinent government agencies including your Secretary of State and the Internal Revenue Service (IRS) (see step 5).

  1. To maintain continuity within your company, it is usually best practice not to file any authority filings during this time period since they can complicate matters further if ownership changes hands in future transactions.
  2. If someone else wants to take over your company after you dissolve it then just dissolve it and start over as a completely new business entity. In this case, you will need to begin filing as a brand new corporation since the dissolution of your existing business entity also terminates its authority within the state to file any more company records with government agencies.

The best way is to have an experienced attorney help you dissolve your S-corporation because he/she has experience in handling the transfer of ownership after a dissolution process.

Step 5. File a Certificate of Dissolution

A Certificate of Dissolution is used within certain states that require all corporations to have their legal existence terminated by court order if they were incorporated or formed under state law but not federal law (i.e DC).

At least 1 member of the board must sign the certificate and it needs to include the name of the corporation, state under which it was incorporated, the effective date of dissolution, and date filed with the Secretary of State’s office. You may need to pay a small fee for filing this document depending on your state’s laws.

Step 6. File paperwork with other government agencies

Once you have dissolved your S-corporation then you will need to file specific forms with the IRS and your state authority (see step 5).

The IRS requires you to fill out tax forms which are considered an information return that reports all taxable income earned by corporate shareholders after the final payout has been made back to them as part of their liquidation earnings.

This form can be filled out electronically once you have decided upon an official dissolution date so don’t forget to do it during this process.

The other pertinent authority that you will need to file with is the Secretary of State where your corporation was legally formed. This usually includes filling out form D-101 which terminates your business entity’s legal existence within the state and must be signed by at least one board member or its manager/president. Then you will file Articles of Dissolution with the Secretary of State.

Step 7. Cancel all insurance policies

Any outstanding liability insurance, car insurance, health insurance, life insurance, etc., will need to be canceled once you have dissolved your S-corp since your company is no longer recognized as a legitimate legal entity after this point has been finalized in the eyes of the law.

  • You can’t collect any money for these types of services either so make sure you cancel them before you finalize the dissolution process.
  • If these types of policies were put in place while your company was still a legal entity then they will be expected to continue paying any outstanding premiums until the end date is reached.
  • You should also notify all affiliates that your company no longer exists and that it can’t offer services to consumers since you have been legally dissolved.

Step 8. Check with other companies

You will need to contact other third-party businesses such as your bank, accountant, local chamber of commerce, etc., where certain documents may have been filed about your S-corp’s existence during this whole process.

These organizations tend to keep a record of each time a business entity files paperwork for various reasons so don’t think they’re going to just forget about your company without saying anything. They just need some time before they update their files so don’t be surprised if it takes them a few weeks or months to actually process the change you are requesting.

How much does it cost to dissolve?

The costs of terminating an S-Corp, as with any corporation, depending on factors such as how many members there are and what state the business is terminated in. Most states have a fee of around $100 to file paperwork for dissolving a corporation.

In addition to termination fees, there may be penalties for not filing the proper paperwork. It is important that businesses seek legal assistance when trying to close down or terminate their business entity.

Final Tax Returns

After dissolution, an S-Corp must file a final tax return. The IRS provides a blank template you can use to report employment taxes and the final income of the business and any additional taxes or fees owed for dissolving. It is important that businesses seek legal advice when trying to close down or terminate their business entity.

Final corporate tax return: Sec. 6037 requires a dissolved C-Corporation to file a final return within two and one-half months following the date of dissolution.

How long does it take to dissolve?

A corporation may be dissolved by filing with the Secretary of State in your state of incorporation, but the exact length will depend on how busy that office is and what they require as proof that all debts have been paid off.

While most states allow 30 days for this process, some states like New York can take up to six months (or longer if a proof isn’t provided) If you are dissolving an S-Corp, your business will be dissolved effective on the date of filing

Conclusion

The process of dissolving an s-corp seems simple on the surface, but there are many small details that can be easily missed.

Understanding termination procedures is important for ensuring that a company does not have to face unnecessary costs or penalties.

The law requires businesses to follow very specific guidelines when they are shutting down or terminating their records with any government law firm.

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