A corporation is a business entity that is legally distinct from its shareholders. This means that, in addition to the shareholders not being personally responsible for the business’s liabilities, the corporation is a separate taxable entity. When a corporation decides to shut down, it must file several documents with the IRS and settle any final tax bills before it can dissolve.
File final quarterly and annual income and employment tax forms. As an employer, a corporation is supposed to withhold certain amounts from their employees' paychecks as well as contribute to certain federal programs. Prior to dissolution, you must file the corporation’s final quarterly employee tax form along with all necessary payments. In general, you must file Form 940 – Employer’s Annual Federal Unemployment Tax Return and Form 941 – Employer’s Quarterly Federal Tax Return.
Read More: What Does Dissolved Mean for a Corporation?
Forward final wage and withholding information to the corporation’s employees. This information is contained on Form W-2 and informs the corporation’s former employees how much money was paid on their behalf to certain taxes.
Prepare and file the corporation’s final tax return. The corporate return is Form 1120. In addition to including all of the corporation’s income and expenses for its final year, be sure to mark the Final Return Box in section E of the form. The box can be found near the top of page 1.
Report termination of the corporation to the IRS. Since the corporation is dissolving, you must report that information separately to the IRS using Form 966. You must also disclose the type of return your business filed, your business’s Employer Identification Number (EIN), when the corporation decided to terminate, and the amount of shares that were outstanding when the corporation decided to terminate. The form must be filed within 30 days of the day the corporation decided to dissolve and submitted to the IRS office where you sent your corporation’s income tax return.
Close your corporation’s EIN account. Draft a statement detailing why you are closing the corporate account and include a copy of the corporation’s EIN Assignment Notice, if possible. Include in the statement the corporation’s legal name, EIN and address.
In addition to filing with the IRS, be sure your corporation files all appropriate paperwork with the states where your business earned income and is registered.
- Entrepreneur: Corporation
- Internal Revenue Service: Closing a Business Checklist
- Internal Revenue Service: Publication 12, Circular E, Employer’s Tax Guide
- Internal Revenue Service: Form 1120 – U.S. Corporation Income Tax Return
- Internal Revenue Service: Form 966 – Corporate Dissolution or Liquidation
- Internal Revenue Service: Canceling an EIN – Closing Your Account
John Cromwell specializes in financial, legal and small business issues. Cromwell holds a bachelor's and master's degree in accounting, as well as a Juris Doctor. He is currently a co-founder of two businesses.