How to Close an S-Corp

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A corporation is considered an independent legal entity. For this reason, if you are incorporated, then simply walking away from can result in a number of legal problems. In particular, you may become personally liable for the corporation's business debts. Although laws differ by state, closing a corporation in any state involves certain common elements. "S corporation" is a tax classification under the Internal Revenue Code, and affects corporate dissolution procedures in relatively minor ways.

Corporate Authorization

The dissolution of an S corporation must be authorized by resolutions of both the directors and the shareholders. You need a formal meeting and a written resolution even if you are a one-person corporation. The dissolution resolutions must be passed by the minimum number of directors and shareholders permitted by state law. In some states, the minimum number is a simple majority; other states require a "super-majority" of, for example, two-thirds of the directors or shares eligible to vote. If the corporate bylaws specifies a higher minimum, the bylaws must be followed.

Dealing with Creditors

After the dissolution resolutions are passed, the corporation must stop doing business except to notify creditors of the corporation's impending dissolution, pay creditors and distribute any remaining assets to shareholders -- a process known as "winding up". You must file final corporate income tax returns with state tax authorities and the IRS, indicate on each return that it is the final return, and pay all outstanding taxes. You must prepare and distribute IRS Schedule K-1 to each shareholder, and issue final payment information to subcontractors. If the corporation has employees, you must provide them with final wage and withholding information, and file a final quarterly or annual employment tax return.

Distributing Assets to Shareholders

Any assets that remain after paying corporate creditors must be distributed among the shareholders. Normally, the corporate bylaws will specify what percentage of assets each shareholder is entitled to receive. If not, then state default rules govern. State default rules usually specify that assets are to be distributed in proportion to each shareholder's ownership percentage. If any shareholder has loaned the corporation money, he is to be treated as a corporate creditor and paid before any other assets are distributed to shareholders.

Read More: How to Change the Shareholders' Percentage in an S-Corporation

State and Federal Filings

Each state applies its own requirements as to what paperwork must be filed to dissolve a corporation. Many states require that a corporation file "articles of dissolution," for example. In addition, many states require the corporation to obtain a tax clearance certificate from state tax authorities to prove that it has paid its taxes. You must file dissolution paperwork in any state that allows the corporation to do business as a "foreign corporation." You must also file Form 966 with the IRS. If the corporation holds any licenses or permits, these may have to be cancelled, depending on state and local law.