In theory, your corporation could last forever, but in reality, many corporations eventually cease to exist. Part of dissolving your corporation involves liquidating corporate assets since the corporation can’t own assets when it is no longer in business. Although your corporate bylaws or state laws may spell out the liquidation and dissolution process, the methods used are generally similar between corporations.
Liquidation of assets occurs once your S corporation has filed its dissolution paperwork with your state’s business registration office, frequently the secretary of state or similar state agency. It may take some time to close down your business and dispose of all your business assets. Before your corporation can truly cease to exist, it must wind up its business affairs. While “complete liquidation” is not defined by the Internal Revenue Code, IRS regulations suggest that your corporation enters liquidation status when it ceases to be a going concern and, instead, corporate activities are mainly for the purpose of closing down the business, paying corporate debts and distributing remaining assets to the shareholders.
Read More: Taxes on a C-Corp Liquidation
You can draft your corporation’s bylaws to describe specific processes for liquidation and dissolution. For example, you could include a provision stating only corporate officers can vote for a liquidation plan or that the corporation must hold a meeting of shareholders before the liquidation plan is approved. If your bylaws give your officers authority to approve dissolution and establish a liquidation plan, the consent of a majority of officers is typically required to begin the dissolution and liquidation process. Your liquidation plan may include tasks like appraising assets, collecting unpaid amounts from your customers, closing open accounts and paying corporate debts.
Depending on the type of business you operate, your corporation may have a large amount of money tied up in non-liquid assets such as real estate, inventory or equipment. These assets must be inventoried and appraised as part of the liquidation process since you cannot distribute the corporation’s assets without knowing how much such assets are worth.
You may have to hire an appraiser or other expert to value assets that are otherwise difficult to price. For some tangible assets, an auction may be the best way to get cash for the items, but intangible assets like patents and trademarks may take longer to sell because of their specialized nature. There are companies who specialize in selling intangible items, so don't assume such items have no value.
Liquidating your corporation does not allow you to skip out on your debts; they must be part of your liquidation plan. Therefore, you must determine how much your corporation owes to each creditor. If your corporation does not have enough assets to cover all of your debts, you may need to negotiate a debt settlement with each creditor before your business can close.
When your S corporation liquidates, any money remaining after the corporation’s creditors are paid must be distributed to shareholders in proportion to their ownership interest in the company. The shareholders’ final federal tax obligations are based on the original price the shareholder paid for his interest in the corporation and whether the assets are sold at a gain or loss. For example, if your shareholders receive more value through the liquidation than they paid for their shares, they may have to pay taxes on the increase in value.
- Internal Revenue Service: Part 4 Examining Process: Chapter 11 Examining Officers Guide: Section 7 Corporate Liquidations/Dissolutions
- U.S. Small Business Administration: Getting Out: Liquidating Assets
- U.S. Small Business Administration: Choose Your Business Structure: S Corporation
- CFO: What’s the Difference? Liquidation vs. Dissolution
- U.S. Small Business Administration: Getting Out: Steps to Closing a Business
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