The Dissolution of an S Corp

by David Carnes
    Dissolution of an S corporation requires shareholder approval.

    Dissolution of an S corporation requires shareholder approval.

    Noel Hendrickson/Photodisc/Getty Images

    An S corporation is a corporation that is subject to special IRS taxation rules. Except for certain taxation issues, the procedure for dissolving an S corporation is the same as the procedure for dissolving any other corporation. However, this procedure varies depending on the state of incorporation.

    Approval

    Generally, an S corporation cannot be dissolved without the approval of its directors and shareholders. Approval takes the form of directors and shareholders resolutions, both of which must be recorded in corporate records. The resolution should also name receivers who are responsible for liquidating corporate assets. Refer to state law, the articles of incorporation and corporate bylaws for the exact procedures necessary to approve dissolution. In the event of a conflict between two or more of these sources, state law takes precedence over both the articles of incorporation and the corporate bylaws. Many states require a "super-majority" of shareholders -- shareholders representing up to two-thirds of outstanding shares -- to approve dissolution, even if corporate bylaws require a simple majority.

    Articles of Dissolution

    A dissolving S corporation must file articles of dissolution, which is a notice of intent to dissolve, or an equivalent document with the state secretary of state. In this document, the corporation states its intent to dissolve so that the state can publish it and potential creditors can make claims against corporate assets. The corporation may also be required to list the names and contact details of directors, officers and receivers.

    Debts and Assets

    Corporate debts must be paid before assets can be distributed and the corporation dissolved. A corporation normally notifies known creditors of its intent to dissolve, and sets a deadline by which any claims may be asserted. The corporation must pay its creditors -- including its employees -- before dissolution is complete, even if its debts are not scheduled to come due until after the date of dissolution. The corporation may have to liquidate its assets to pay its debts. Shareholders receive distribution of any funds or assets remaining after corporate debts are paid, in proportion to their relative shareholding percentages. If the corporation's debts exceed its assets, however, the corporation's limited liability protects shareholders from its excess debts.

    Taxes

    The corporation must file a final Form 1120S, the S corporation tax return, before it completes dissolution; it must also file a final state tax return with its state of incorporation. If it does business in states other than its state of incorporation, it must file final tax returns in these states as well. The corporation must file Schedule K-1 with the IRS, and must distribute individualized versions of this form to each shareholder. Since S corporations are pass-through taxation entities, except with respect to certain forms of passive income, it is unlikely that the corporation will owe federal income taxes, although shareholders will owe taxes on any corporate profits. Many state governments also recognize pass-through taxation status for S corporations. The corporation must file Form 966 with its final tax return to notify the IRS of its dissolution, and may have to file dissolution notices with state tax authorities.

    Other Paperwork

    A dissolving S corporation must terminate any insurance policies it holds, cancel any business licenses and transfer title to any titled assets -- such as real estate -- that are being transferred to creditors or shareholders. It must also cancel contracts and leases that extend beyond the dissolution date.

    About the Author

    David Carnes has been a full-time writer since 1998 and has published two full-length novels. He spends much of his time in various Asian countries and is fluent in Mandarin Chinese. He earned a Juris Doctorate from the University of Kentucky College of Law.

    Photo Credits

    • Noel Hendrickson/Photodisc/Getty Images