How to Close an S Corp.

By Stephanie Kurose, J.D.

How to Close an S Corp.

By Stephanie Kurose, J.D.

One common misconception about closing down a business is that its owners can simply walk away from it. While it is certainly easier to dissolve a sole proprietorship, a partnership, or even a limited liability company, dissolving a corporation—including an S corp.—is more complex and requires the owners to take certain actions before the entity is considered formally closed.

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State law governs corporate dissolution, so where your business operates and where it was created impact the exact requirements for closing. However, there are certain elements that are common in each state. Follow these steps when closing down your operations.

1. Approval by Directors and Shareholders

First and foremost, to dissolve a corporation, the owners must follow whatever guidelines the company's articles of incorporation provide. This is a legally binding document filed with the state at the business's inception.

Many articles require authorization from the board of directors and shareholders for dissolving the company. To do this, a formal meeting must be held where the appropriate people vote on a written resolution to close their doors. State law provides a minimum number of votes that must agree for the resolution to pass. However, if the bylaws specify a higher number of required members for a vote to pass, they must adhere to that instead.

2. Articles of Dissolution

If the board and shareholders vote to close their doors, the company must file articles of dissolution with the Secretary of State, or other state agency that regulates businesses. If it fails to do so, it is still considered an active entity and is liable for taxes and required filings.

3. Winding Up

The process of "winding up" includes selling all corporate assets, paying off lenders and creditors, and distributing any remaining assets to the shareholders. The corporation must notify any lenders and creditors that it intends to dissolve and pay off any remaining debts. It can then distribute any assets that remain after paying off all debt to them.

Typically, the corporate bylaws govern what percentage of assets each shareholder is entitled to receive. If the bylaws are silent on this subject, state law governs. The majority of states require that the distribution of assets is proportional to each person's ownership. If that person loaned the corporation money, they are treated as a corporate creditor, and the business must repay them before any other distributing assets to others.

4. Obligations to Employees

State law governs how employees are issued their final paychecks, and the company must pay all final payroll taxes. In addition, federal law requires that those with 100 or more employees give them at least 60 days' advance written notice of the business closing.

5. IRS Requirements

When a corporation dissolves, it must also notify the Internal Revenue Service (IRS). The IRS requires that the final quarterly or annual returns be filed as well as any final employment tax returns if the company has employees. They provide a checklist for closing your business on its website.

Dissolving a corporation is a big decision and can be a headache if not done properly, but often there are bylaws that provide guidance for the process of closing down. If you would like more information, you can visit your Secretary of State's website and also sit down with the appropriate officers, directors, and shareholders.

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.