There are currently more than 32.5 million businesses operating over the United States. Each of these offers unique services and products to its customers, as well as employment opportunities for the local community.
However, with more new business applications being submitted in America than ever before, your competition is fierce. Because of this, only 50% of new businesses will survive for longer than five years. So what happens if you are preparing to bid your business farewell and move on to your next venture?
Well, if you want to close a business you have to do a bit more than shut up your shop front! In fact, if you want to officially close your business you will need to dissolve it and there are lots of steps you should take.
Want to know more about S Corp dissolution? Then you’ve come to the right place. Read on for our step-by-step guide for S Corporation closure.
What is an S Corporation?
There are very different approaches that you have to take to dissolve a business and this depends on the classification of your company. So before you look into dissolving an S Corp, it is important to check that your business is actually classified as one!
There are several types of businesses that you can set up. These include:
- Sole proprietorships
- Limited liability companies (LLCs)
- C Corporations
- S Corporations
Your business classification is determined by the structure of your business and how you choose to pay your taxes in your yearly tax returns.
The main defining characteristic of an S Corporation is that it passes its corporate finances through its shareholders. This includes any incomes, losses, credits, or deductions.
This helps to limit company liability and removes the risk of facing double taxation on business and income tax returns. S Corps also only need to file their taxes on an annual basis, rather than filing quarterly taxes like C Corps.
To register your business as an S Corp, you must:
- Be a legal resident of the United States
- Have no more than 100 shareholders
- Incorporate your business by filing Articles of Incorporation
If you still aren’t sure whether your business is an S Corp or not, you can find out by logging into your IRS or EIN accounts.
What Does S Corp Dissolution Mean?
If you want to close your business then you could simply cease trading and sell off your business premises. However, without dissolving your company, it will still officially exist.
This means that the IRS will expect you to continue fulfilling your tax obligations each year until you have finished the S Corp Dissolution Process. You may also have to continue paying certain license fees even if you do not use them!
In order to officially close your business in the eyes of the government and the IRS, you have to dissolve it. This involves tying up any loose financial ends and get your paperwork in order. Once you have officially dissolved your business, you can walk away from it knowing everything has been taken care of.
If you run an S Corp then you will have shareholders who have invested in your business. In that case, they have a financial stake in the outcome of the business. So you need to involve them in large decisions, such as closing the business.
There are two main types of S Corp dissolution that you should know about:
- Voluntary dissolution (led by the company itself)
- Involuntary dissolution (resulting from a court or administrative order)
During a voluntary dissolution, each shareholder should receive one final dividend payment. This is, of course, provided that the business has anything left once you have paid off your remaining taxes and debts.
You must pay off any liabilities or debts before you pay out to any of your shareholders. If you pay them first and are unable to pay off your debts when closing your business, then your shareholders could become liable.
In some cases, an S Corp business will be dissolved by a court or administrative order. In that case, each of your shareholders can compile a list of their expenses and liabilities to be paid out.
Do You Have to Dissolve Your Corporation?
When your business closes, you do not necessarily have to dissolve it. If you want to lock the door and walk away from your business, you could theoretically do this. Provided that you keep turning in tax returns and that you have paid all of your employees, this might not be an issue.
That said, even inactive businesses will be monitored by the IRS. While your business exists you will be liable for anything that happens to it. So, you will have to make sure it stays in good standing till the process of closing your S Corporation(S Corp Dissolution) is completed.
Why is it Important to Dissolve an S Corp?
You can choose to allow your business to become inactive rather than dissolving it. However, without officially closing your business, you will still have to regularly submit paperwork for it.
Essentially, you have to continue to manage it as if the business is still up and running. So you will still have a lot of extra work on your plate.
On top of this, once you have new ventures on your plate, you run the risk of losing track of what is happening with your old S Corp. If this happens and you submit incorrect information to the IRS you may face a formal investigation.
Dissolving your company properly ensures that:
- You can avoid formal financial investigations
- You maintain your business reputation for future ventures
- You protect your shareholders’ reputations
- You can avoid the cost of additional liquidation fees and expenses
- You can focus on your future ventures rather than wasting time managing your old business
With that in mind, let’s take a look at exactly what you need to do in order to dissolve your LLC S Corp.
If you are planning a voluntary dissolution, then the first thing you will need to do is organize a board meeting to discuss this. This is because corporate bylaws dictate that you must seek certain permissions before dissolving an S Corp.
It is also worth checking the corporate laws in place in your state. Some states have strict guidelines for the beginning of the S Corp dissolution procedure.
To seek permission to dissolve your S Corp, you should put this to a vote with your Board of Directors. During this meeting, you can explain why it is in the company’s best interest to dissolve. Once the Board of Directors has approved the dissolution, the vote passes onto the shareholders.
In most cases, you need a majority vote to pass a resolution to dissolve your company. The exact figures you need will be outlined in your state’s corporate laws and in your shareholder’s paperwork.
So make sure you check this before taking a vote. Ideally, you want to enter a vote confident that you will come with your approval from your Board of Directors and shareholders.
2. File a Certificate of Dissolution With Your Secretary of State
Once you have the approval to dissolve a corporation, you can move forward with the official process. To start this, you need to prepare and file your Certificate of Dissolution.
This is a formal notice that you submit to the secretary of state. It documents your company’s dissolution with the American public and the government.
It is worth noting that you may have to pay for a copy of your Certificate of Dissolution and any administrative fees attached to this. This cost varies depending on which state you live in.
For example, in Delaware, the Certificate costs $204 plus $9 for each additional page that you file. In comparison, you will pay a maximum of $15 to file a Certificate of Dissolution in California.
Of course, you must file your certificate in the state where your business is registered. So you cannot move to try and avoid hefty state fees.
3. Notify the IRS and Any Other Tax Authorities About Your Dissolution
After filing your Certificate of Dissolution you should notify the IRS about your company’s dissolution. You should also inform any other tax-related authorities, such as the Social Security Administration.
The IRS has a checklist of forms that you need to file along with your final tax return. For an S Corp, these include:
- Form 1120-S and Schedule D (Form 1120-S) for the year that you close your business
- Form 4797 for the sale of any business property
- Form 8594 if you have sold your business
If you run an S Corp then the chances are you have employees on your payroll. In that case, you will also need to:
- Submit form 944 in your annual federal tax return (including the date of any final wage payments) and form 940
- Submit form 8027 if your business managed employee tips
- Provide each of your employees with a W-2 Form
- Send Copy A of your W-3 form to the Social Security Administration
When you submit your final tax return, you also need to check the “final return” box on the front of your return and on your Schedule K-1 form.
Continue Reading S Corp Dissolution to understand remaining steps to S Corp Dissolution and properly closing your S Corporation.
4. Pay Any Business Tax You Owe
Each year your business should submit a tax return to the IRS. This outlines gains and losses that you have made over the year. If your business is doing well and makes a profit then you will have to pay tax to the government after submitting your return.
It is very important that your tax debts are all up-to-date before your dissolve your company. If you do not pay your tax debt on time, you could face penalty charges. On top of this, the government may try to seize any remaining assets that you have to cover the tax debt.
You should not try to dispose of any of your business’s assets in order to avoid paying your taxes. Doing this could result in further severe penalties and interest on your existing tax debt.
5. Send Out a Formal Notice of Dissolution
When you start dissolving a company, it is important to keep everyone involved in the loop. After all, finding out about a company’s dissolution from someone other than the company could panic your creditors or employees.
Because of this, you should send out a formal Notice of Dissolution to any creditors that you have. This should provide details of how they can make claims for final payments from your company.
In some states, you are allowed to create a deadline for final payments claims. However, it is a good idea to get advice from a local attorney on this before putting it in your Notice of Dissolution. That way you protect yourself, your employees, and your shareholders from liability.
Speaking of employees, it is important to keep the people who work for you informed as well. After all, if you haven’t ceased trading already then closing your business will have a big impact on their lives.
To do this, arrange a meeting with all of your managers and discuss what is happening and when the business is going to cease trading. You should also schedule meetings for your managers to inform their teams about what is happening. Try to ensure that all these meetings happen as close together as possible, so the news doesn’t spread between teams first.
6. Settle Any Creditors’ Claims
If your creditors make a payment claim after you have sent out your Notice of Dissolution you have two options:
- Accept and pay the claim
- Dispute the claim
It is worth noting that if you dispute a claim, a creditor can bring a lawsuit against the company in order to collect the debt instead. This can end up costing you a lot more than the original claim. So, before you dispute a claim, it is worth assessing how successful the dispute will be and whether you can afford the litigation.
Valid reasons for disputing a claim depend a little on your local state laws and how federal laws apply to your individual case. If you are not sure where you stand on a claim dispute, you should get advice from a business attorney. They will be able to recommend whether or not you follow through with your claim dispute.
7. Liquidate Your Assets
Once you have paid off any debts that you have to your creditors, you can turn your attention to your company’s remaining assets. These include:
- Cash and money that you still have in the bank
- Business owned buildings and vehicles
- Equipment and office furniture that is in good working order
- Software and patents that you own
You can liquidate your assets by selling them to other companies directly or by auctioning them off. This may take a while so it is important to be organized with your asset sales.
You should also keep a record of any sale transactions that you have made while liquidating your company.
It is very important that you try to get the best possible price for your assets when liquidating. This ensures that your shareholders receive a fair final dividend payment. So the sales records you have should reflect the market value of your assets.
Once you have liquidated your business, the value you have received for your assets will be distributed among your shareholders. The amount each shareholder receives depends a little on their contracts and on your state’s corporate bylaws.
Usually, shareholders will receive a percentage of the value of your remaining assets. This percentage relates to the amount of corporate stock that they own.
For example, let’s say that someone owns 10% of your corporate stock. In that case, they should receive 10% of the business’s final assets. This is the amount left to be distributed after you have settled your debts and liquidated the company.
If you company has a range of stock classes then you have to be very careful about the distribution of assets. Your corporate officers and Board of Directors will need to carefully calcalute the value of each shareholder’s stock. This involves following corporate bylaws to ensure that everyone receives a fair final payment.
9. Balance Your Books
After distributing your final assets, you can turn your attention to your company’s corporate books. Your financial team and board members need to ensure that all of your books are balanced properly and that they zero out.
This shows that you do not have any financial assets left unaccounted for. So your business is financially prepared to close.
10. File Your Final Tax Return
Once you have balanced your books, you can turn your attention to completely your final corporate tax return. This should be completed for the year that you officially dissolved your business.
For example, if you stopped trading in 2020 but didn’t dissolve your company until June 2021. Then technically you company still existed even if it didn’t make any money.
In that case, you will need to file a final tax return for your company by March 15 2022. Of course, you can prepare your tax paperwork immediately after dissolving your company while everything is fresh in your mind. This reduces the risk of your overlooking anything in your final tax return.
Your final tax return will include:
- Details of any capital gains or losses that you have made
- The value of your assets at liquidation
- Employee tax payments
- Deductions you have made for the running of your business
If you run an S Corp you may want to get support from a tax attorney or accountant when completely your final return. They will ensure that you have provided everything you need to and will prevent mistakes that could come back to haunt you.
11. Pay the Tax You Owe
The IRS will use your submitted tax return to calculate how much tax you owe. Failure to pay your tax on time could result in fines of up to $500,000 or up to 5 years’ jail time. So make sure you don’t put your payment off!
You can find out how much tax you need to pay but logging into your IRS business account. To settle this up, you can make a payment using:
- Same-day wire transfers
- The US mail
- Authorized retailers for cash transfers
- Electronic funds for e-filing
Of course, some people will struggle financially following the dissolution of a business. If this is the case, you may be able to organize a payment scheme for the tax that you owe. You have to apply for a payment plan and the IRS will decide whether you qualify or not.
12. Close Your Accounts
Final Step to “S Corp Dissolution” is Closing Your accounts. Once you have made your final tax payment to the IRS, you can close your business’s accounts. This includes closing down your IRS business account and canceling your employer identification number (EIN).
Your EIN is a unique number that you receive when you register your business. Every company has one and these numbers do not get reused, so yours will always remain attached to your business even after you’ve dissolved it.
To close these accounts you need to send the IRS a formal cancellation letter that includes:
- Your business’s full name and registered address
- Your EIN number
- Your reasons for closing your account (essentially that you have dissolved your business)
The IRS will have sent you a notice including your EIN when it was first assigned to your business. If you still have this notice then you should include this in your letter as well.
Once you have all of this information together you can send your cancellation letter to the IRS at: Internal Revenue Service, Cincinnati, OH 45999. Provided that you have completed your final tax return and submitted the appropriate forms, the IRS will then be able to close your accounts.
Officially Dissolve Your S Corp Today
As you can tell, when it comes to Closing S Corporation & S Corp dissolution there are a lot of things you need to do to officially take your company off the map. These steps will ensure that your business is properly closed down and that you have taken care of everything you need! So you, your shareholders, and your employees are protected from future liable.
It is also a good idea to hold onto a copy of your company’s paperwork for at least five years after you have dissolved it. That way if the IRS have any questions for you, you’ll have everything you need to answer them!
Need help filing your final company tax return? Then check out the best tax calculators around now — they will get you started in no time at all! Now that you have read “S Corp Dissolution: Your Complete Guide to the Process” we recommend continue learning more by clicking on Learn More Below.