To close an S corporation, or S corp, there are a number of steps you must take to ensure that the corporation has settled its debts and will no longer be liable for taxes. Both the board of directors and the shareholders must agree to close the corporation. You should inform all business associates, creditors and consumers about the dissolution, and ensure that all business debts and wages are paid. Finally, you must notify the state and file final tax returns.
Vote for Dissolution
Both the board of directors and the shareholders have a say in whether or not to dissolve the S corp. The dissolution process begins when the board votes to submit a proposal for dissolution to the shareholders. The shareholders then vote on the proposal. Unless otherwise specified in the bylaws or articles of incorporation, North Carolina law requires a majority vote by the board and the shareholders to close the corporation.
Winding Up Business
Once the corporation has decided to dissolve, you must notify all business associates and creditors of the decision. The board should form a plan to settle all remaining debts, and include a plan to set money aside to pay final taxes. You must ensure that all the employees of the corporation are paid their final paychecks when due. You must also contact customers who may owe money to the business.
Distribution of Assets
If there are remaining assets after the corporation has paid off debts and set aside income for taxes, the rest of the assets must be distributed to the shareholders. The amount each shareholder receives must be proportional to the shareholder's interest in the company. You should review the articles of incorporation and the bylaws to see if there are any provisions regulating how assets are to be distributed to shareholders upon dissolution.
Articles of Dissolution
You must file articles of dissolution with the North Carolina Secretary of State to notify the state that the corporation will no longer be doing business. You may obtain the articles of dissolution form on the secretary of state website. If your corporation has not issued shares to stockholders, you will file the "Articles of Dissolution Prior to the Issuance of Shares" form. Otherwise, file "Articles of Dissolution by Board of Directors and Shareholders." On the form, you must include the name of the corporation, names and addresses of the officers and directors, the date of dissolution, and a statement that the shareholders approved of dissolution. You must mail the form to the corporations division of the secretary of state with the appropriate fee.
There are a number of IRS forms that you must submit upon the dissolution of the corporation. If the corporation has employees, you must issue final W-2 forms to each employee with wage and withholding information, and provide W-2 information to the IRS on form W-3. The S corp must file any annual or quarterly employment tax on IRS Forms 940 and 941. A dissolving S corporation is required to file form 966 with the IRS within 30 days of the corporate resolution to dissolve. Further, you must file the final S corp income tax return on form 1120S within 3 months after the dissolution date. Further, If your S corp collected sales taxes, you must submit the final forms and funds due up until the dissolution date to the North Carolina Department of Revenue.
Elizabeth Rayne earned her J.D. from Penn State University and has been practicing law since 2009, advising clients on issues ranging from employment law to nonprofit management. For two years, she served as a contributing editor for the "Vermont Environmental Monitor."