How Is an S Corporation Terminated?

by John Cromwell

Terminating an S corporation can mean two things. The first is that the business merely wants to terminate its election to be taxed as an S corporation. This means that the organization will continue operating as a business. The second possibility is that the corporation wants to cease doing business altogether. The procedures for achieving these goals differ substantially.

Terminating the S Corporation Election

Step 1

Determine if your S Corp status has been automatically terminated. A business loses its tax status as soon as it no longer meets the requirements set forth by the Internal Revenue Service. For example, if the business aggregates more than 100 shareholders or issues another class of stock, it will lose its tax status. A business will also lose its status if it allows a partnership, corporation or a non-resident alien to become a shareholder.

Step 2

Hold a shareholder vote on terminating the corporation’s tax status. A majority of the shares issued must vote to support this action. So, if three shareholders out of 10 vote to terminate the S Corp status, but those three control 52 percent of the company’s stock, then the business can change its tax status.

Step 3

File a statement with the IRS affirming the corporation’s intent to terminate its S Corp tax status. The statement must detail the number of shares issued and outstanding, and the number of shares owned by each stockholder on the day of the vote. Every shareholder that voted to terminate the tax status must sign the statement. The statement can specify the date that the status is terminated. If a date is not specified, the business will generally lose its tax status at the start of its next tax year. The instructions for IRS Form 2553 provide the address where the business should mail its signed statement.

Terminating an S Corporation As a Business

Step 1

Prepare the corporation's final tax return. When filing IRS Form 1120S for the last year of the company’s operations, check the “Final Return” box in the “Item H” section.

Step 2

Send out the final Schedule K-1 to all shareholders. Be sure to check the “Final Return” box on each K-1 form.

Step 3

File the appropriate documents with the state where you incorporated. Since corporate law is defined by each state, the process for dissolving a corporation may vary. Generally, you will be required to file articles of dissolution with the Secretary of State.