How do I shut down an S corporation?
Every business--even a very successful business--eventually ends. Accordingly you will need to someday to shut down, or liquidate, any S corporations you start.
Note: The discussion here focuses on steps for dissolving an S corporation, but the information will probably also be helpful if you're asking yourself questions such as, "How do I end a corporation?", "how do I dissolve a regular corporation?", and "how do I stop doing business as a corporation?".
Fortunately, shutting down an S corporation doesn't have to be that much work. But let me explain.
Submitting Articles of Dissolution
Legally what you do to "shut things down" is file articles of dissolution with the secretary of state in the state where you formed the corporation or limited liability company used for the S corporation.
If you have been operating a California S corporation, for example, you will need to file articles of dissolution with the California Secretary of State's office. And, by the way, the actual form you use for dissolving the S corporation will depend on the type of entity you used originally as the platform for your S corporation. You will use one form to dissolve a limited liability company and another form to dissolve a regular corporation.
Filing Final Tax Returns
For tax accounting purposes, you will need to file one last S corporation 1120S tax return, marking the return as "final." You should also technically file the form 966 with Internal Revenue Service. The 966 form and instructions are available at the www.irs.gov web site.
Distributing Assets to Shareholders
One other "S corporation liquidation" wrinkle should be mentioned: Any assets that your S Corporation owns at the time of liquidation will in effect be distributed to shareholders. If an asset's fair market value exceeds its depreciated basis, you will unfortunately need to show a gain on the distribution of the asset to the shareholder on the final corporate tax return. In other words, if you purchased a $2,000 laptop computer that you fully depreciated and then you distribute the laptop to yourself as shareholder, you need to book a gain on the distribution. The gain equals the fair market value of the laptop.
Caution: You don't want to distribute assets to shareholders if the assets' depreciated basis exceeds the fair market value. For assets carried at a book value in excess of fair market value, you want to have the S corporation sell the assets to generate the loss.
Additional Information You May Find Useful
If you want additional information about how to maximize the tax savings related to running a business or investment venture, you may also be interested in one of our downloadable e-books (see descriptions below). Each book covers a category of tax planning topics that easily save a business owner significant amounts of income or self-employment taxes (potentially thousands of dollars a year) and is instantly downloadable.
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