Terminating a New York S Corp

A corporation is an independent legal entity under New York state law. It begins life when it is created or organized, and it "lives" until it is legally dissolved. During a corporation's lifespan, it must pay New York state taxes, and this obligation continues until the corporation is dissolved. New York corporations are either C corporations (C corp) or S corporations (S corp). An S corp allows for the pass-through of income both for federal tax purposes and for state tax purposes in states that allow them. New York is one such state.

Opting to make a corporation an S corp is not difficult as long as the requirements are met. Dissolving a New York S corporation also requires more than just a decision to do so; the state requires that certain formalities be completed before dissolution is final.

In New York, there are two types of corporations, an S Corp and a C Corp. The differences between these two involve different rates on corporate taxation, treatment of losses, ownership and profit distribution. Every corporation in New York starts as a C Corp. That is the corporate status default. When a company files articles of incorporation with the New York Department of State, the certificate of incorporation lists the company as a C Corp.

To change to S Corporation status, an election must be made, starting with the unanimous approval of the shareholders, demonstrated by their signatures on IRS Form 2553, Election by a Small Business Corporation. To opt for S Corporation status, the corporation must be owned only by citizens or residents of the United States, have 100 or fewer shareholders, and only one class of stock. Once a corporation becomes an S corporation for federal tax purposes, it can also elect to be treated as an S Corporation under New York laws if all shareholders consent.

Why opt for S Corporation status? The main benefit is a different type of corporate taxation. A C Corporation is taxed at a rate of 21 percent on its net taxable income. Any distributed profits are taxed again.

In an S Corporation the net taxable income of the business is reported from the get-go as shareholder income, based on each shareholder's percentage of ownership. This is termed pass-through taxation and avoids a double tax. Losses are also attributed directly to the shareholders.

New York law requires shareholder approval to dissolve an S corporation. For a corporation formed on or after March 1, 1998, a majority of the shareholders must elect to dissolve it. If formed before that date, two-thirds must consent. Once that occurs, the company can move forward to obtaining a tax clearance certificate, one of the requirements to dissolve an S Corporation in New York.

After obtaining shareholder consent, the officers of the S corporation to be dissolved must file a final state tax return and mark the "final" box to indicate that this is the last return. That is a requirement for obtaining a requisite tax clearance certificate from the New York State Tax Department.

The New York Business Corporation Law also requires that a corporation obtain the consent of the State Tax Commission before it can be dissolved. This may be triggered by the final tax return filing, or a corporate officer can submit a request by calling 800-327-9688, or mailing or faxing a written request. The information required is the exact business name, the corporation's identification number (state or federal tax number), and the address to which the consent should be mailed. The person filing should also provide their name, telephone number and relationship to the corporation.

Once the request has been filed, the State Tax Department will review the corporation's tax history to be sure that it has filed appropriate state tax returns for all years it was in operation and also to see whether there are any outstanding taxes or maintenance fees. It usually responds to a request for consent to dissolution within five business days of the time the request is submitted.

If further actions on the corporation's part are required before dissolution, the department will advise the corporate officers of this. Assuming all is in order, the State Tax Department will prepare and deliver a tax clearance certificate to the corporation's registered mailing address.

The actual document used to dissolve a New York S Corporation is called a Certificate of Dissolution. This may sound complex, but it is actually a short form that requires only basic information about the corporation, including:

• Corporation's original name.
• Corporation's current name if the name has been changed since the S corporation was formed.
• Date of filing the certificate of incorporation with the New York Department of State.
  
• Names and addresses of all corporation officers.
  
• Names and addresses of all corporation directors.
  

The form for a Certificate of Dissolution is available for download from the website of the New York Department of State. The corporate officers fill out the dissolution form and file it with the New York Department of State. They must attach two copies of the tax clearance certificate issued by the Department of State Taxation to the Certificate of Dissolution when it is submitted.

A filing fee is also required. This fee may change from time to time, but as of the time of publication, the filing fee is $60. It is possible to mail these documents to the New York Department of State, but they can also be faxed or delivered in person.

Although the corporate officers must complete and file the Certificate of Dissolution, the S corporation is not automatically dissolved when the document is filed with the Department of State. Rather, the New York Secretary of State must process it. Generally, they will complete regular processing within seven business days.

If the shareholders cannot wait seven business days to dissolve a corporation, they can ask to have the processing expedited. This will incur extra fees, with the amount depending on how quickly they require processing. The options include: 24-hour processing, same-day processing and two-hour processing. The former is permissible if the request is submitted between 9 a.m. and 4 p.m.

For same-day processing, the documents must be delivered or faxed before 12 p.m. Documents delivered or faxed by 2:30 p.m. are eligible for two-hour processing.

For any of these expedited procedures, the corporate officers must pay the standard New York filing fee of $60. To this, additional fees will be added for expedited processing. The charge for 24-hour processing is an additional $25; for same-day processing an additional $75; and for two-hour processing an additional $150.