The Dissolution of an S Corp

By David Carnes

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.


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.

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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.


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.

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Terminating a New York S Corp



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What Happens to a Shareholder in a Dissolved Corporation?

A dissolved corporation ceases to legally exist and the effect this has on its shareholders depends on how it was dissolved. If the corporation is dissolved voluntarily and its assets distributed to the shareholders without paying all remaining corporate debts, the shareholders could become liable for the debts. If the corporation is dissolved involuntary by the court or administratively by the state, the shareholders can incur additional expenses and liabilities. Avoiding these negative financial consequences requires proper dissolution of the corporation.

What Are All the IRS Filings for an S Corp?

A "C" corporation is a standard corporation, while an "S" corporation has elected a special tax status with the IRS, allowing it to be taxed as a flow-through entity that passes its income through to its shareholders instead of filing a return in its own name and paying taxes at the corporate rate. To ensure that the IRS receives taxes on that income, however, it strictly limits the number and type of shareholders that an S corporation can have. The IRS filings to elect, maintain and terminate S corporation status are specific because the IRS requires proof that the corporation and its shareholders are eligible for S corporation tax treatment.

S-Corporation Meeting Minutes Requirements

All corporations are formed under state law and are considered C corporations when first formed. In order to maintain good standing with the state, corporations must comply with state laws governing the management of the corporation, which include the requirement that meeting minutes be kept with the corporation’s books and records. For federal income tax purposes, a C corporation can elect to be taxed under Subchapter S of the Internal Revenue Code -- after which it is considered an S corporation. Although there is a significant difference in taxation between C and S corporations, there is no difference between the two types of corporations regarding compliance with state laws governing meeting minutes.

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