Taxes on a C-Corp Liquidation

By Wayne Thomas

When a corporation ceases its business operations, all assets owned by the company must be distributed. This process is known as liquidation and is necessary, even in cases when the corporation is being sold or converted into a different business structure. As part of every liquidation, state and federal income, payroll and capital gains taxes must be paid at both the corporate and individual levels.

C Corporations

A C corporation is a business entity governed by Subchapter C of the Internal Revenue Code. Corporations are the most widely known business forms, providing limited liability to shareholders and allowing ownership to be freely transferred through the buying and selling of stock. C corporations are also subject to what is known as "double taxation." This type of tax treatment means that income and gains on property are taxed first at the corporate level and then again at the individual shareholder level for any dividends received.

Liquidation

The double taxation feature inherent in C corporations plays a special role in liquidation. The liquidation of a company means that the business operations have ceased and the assets and property owned by the corporation are redistributed. Liquidation is generally accomplished by either selling these assets or transferring all of the shares in the corporation. Possible reasons requiring liquidation are the closing or sale of the business or changing the business structure to provide more favorable tax treatment. Each of these actions produces potentially taxable events at the corporate and individual shareholder levels.

Ready to incorporate your business? Get Started Now

Conversion

The owners of a C corporation may be interested in converting the company into a limited liability company, or LLC. While there are several reasons for doing this, one reason is to eliminate the double taxation feature of corporations. As part of the conversion, the assets owned by the corporation must first be transferred to the shareholders in exchange for stock. The shareholders will then transfer the assets to the newly created LLC. This liquidation results in an initial tax on the corporation for any gains on the property. Gain is calculated by subtracting the value of the property transferred from its worth at the time it was acquired. The shareholders are also taxed on the transfer, provided the assets exceed the value of the stocks traded. These taxes can be significant if the corporation and shareholders own primarily intellectual property, such as a secret recipe, that had no value at the time the company was established but is now worth millions as a trade secret.

Sale

The sale of a C corporation is also a taxable event for both the company and shareholders. A sale can be accomplished by either transferring all of the corporate assets or transferring all of the stock. Liquidation of the assets will result in a tax on the gains, similar to that observed in changing business structure. If the stocks are transferred instead, this will result in a capital gains tax on any appreciated value in the stocks at both the corporate and shareholder level. Many owners choose this option because the capital gains tax rate is lower than the rate applied to the sale of appreciated assets.

Ready to incorporate your business? Get Started Now
What Is the Difference of a Shareholder Vs. a LLC Member?
 

References

Related articles

Is a Corporation the Same as an LLC?

At one time, there were only three options for company organizers choosing a form of business organization: the sole proprietorship, the partnership and the corporation. Then in the 1970s, the limited liability company (LLC) was introduced in some states. As of 2010, LLCs are authorized by all 50 states and the District of Columbia. It is similar to the corporation in some ways and different in others.

Difference Between LLC & Inc

A limited liability company, or LLC , is a hybrid business entity that includes some features of corporations. For example, both corporations and LLCs provide their owners protection against the debts of the business. There are some crucial differences, however, that should be considered when choosing the best form for your business.

The Dissolution of an S Corp

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.

LLCs, Corporations, Patents, Attorney Help Incorporation

Related articles

Distributions to LLC Members Vs. Dividends

Members of a limited liability company, or LLC, and the shareholders of a corporation are similar in that they each ...

What Forms Do I Need to File for an S Corp?

An incorporated business is automatically designated by the Internal Revenue Service as a C corporation for income tax ...

Corporation Law Notes

A corporation is a legal entity that gradually developed into its modern form over hundreds of years. It is designed to ...

Difference Between LLC & Sub S Corporation

Limited liability companies (LLCs) and Subchapter S corporations (S corps) have both become popular corporate forms for ...

Browse by category
Ready to Begin? GET STARTED