The Dissolution of an S Corp.

By Edward A. Haman, J.D.

The Dissolution of an S Corp.

By Edward A. Haman, J.D.

Just as there are formal procedures required to form and register a corporation, there are certain procedures and forms required to terminate a corporation. The termination of a corporation is known as "dissolution."

Businesspeople having heated discussion over conference table

Types of Dissolution

There are two ways an S corporation may be dissolved:

  • Involuntary dissolution. Dissolution is involuntary when the state dissolves the corporation, typically due to the corporation failing to pay taxes or file required reports, or engaging in some unlawful activity.
  • Voluntary dissolution. Dissolution is voluntary when the business owners (more specifically, the board of directors and the shareholders) decide to dissolve the corporation.

Basic Voluntary Dissolution Procedure

There are five basic steps involved in voluntarily dissolving an S corp. The time frames for the completion of some of these steps may overlap.

1. The board of directors approves a resolution for dissolution.

To get the dissolution started, a board of directors meeting is held and a vote is taken on the proposal for dissolution. Dissolution must be done according to both the legal requirements of the state where the corporation was formed and the requirements laid out by the corporation's articles of incorporation and bylaws. The results of the vote need to be recorded in the minutes of the meeting.

2. The shareholders vote to approve the dissolution.

Once the board approves dissolution, a meeting of the shareholders is scheduled. The shareholders vote on the proposal for dissolution. Again, state law and the corporation's articles of incorporation and bylaws must be consulted for any special requirements for dissolution. For example, it may be that approval of two-thirds of the shareholders is required, rather than a simple majority. The shareholder approval also needs to be recorded in the minutes of the shareholders meeting.

3. Corporate debts are paid.

After dissolution has been approved, a process commonly called "winding up" begins. Winding up involves ending new business activities and taking the actions needed to pay off outstanding debts of the business. It often includes selling assets in order to obtain the cash needed to pay off debts. Debts include any federal, state, or local taxes that may be owed (see “Dissolution and the IRS").

It may be necessary to provide an official notice to all creditors of the business. Also, any pending lawsuits, fines, or other claims against the corporation will need to be resolved.

4. Any remaining assets of the corporation are distributed to the shareholders.

If any assets remain after the payment of all debts, they need to be distributed to shareholders, in proportion to each shareholder's ownership interest. Distributing assets often involves selling them and distributing the funds received. However, especially with the smaller S corporation, it may result in distributing items of property directly to the shareholders.

Also, be sure to close out business bank accounts, lines of credit, and credit card accounts and to cancel any insurance policies, licenses, registrations, or permits in the company name.

5. Dissolution documents are filed.

The exact documents that will need to be filed will depend upon the state where the corporation is registered. Typically, in the state of incorporation, a document titled "Articles of Dissolution" or " Certificate of Dissolution," or something similar, will be filed. If the corporation is also registered to do business in another state, a document titled "Application for Withdrawal of Registration," or something similar, will be filed. There is often a filing fee. Forms and dissolution requirements can usually be found on the state's website, and forms can often be filed online.

Dissolution and the IRS

There are numerous federal tax filings that may be necessary in connection with dissolving an S corp. These will include the usual Form 1120S and employer and 1099 tax forms that would be filed for any year. Some forms include a box to check to indicate it is the final return for the business. Form 966 (Corporate Dissolution or Liquidation) must be filed, and forms may also need to be filed relating to the sale or exchange of corporate assets (for example, capital gains). For a checklist of IRS forms that may need to be filed, see this checklist for closing a business.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.