How do I shut down an S corporation?
Every business eventually ends. Even a very successful business.
Accordingly you will need to someday to shut down, or liquidate, any S corporations you start.
The good news here is shutting down an S corporation doesn't have to be that much work.
The tiny bit of bad news is you do need to take care of some important details in order to truly tie up all the loose ends.
This short article walks you through the steps.
But one other thing to 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?".
Submitting Articles of Dissolution
To shut down your S corporation legally, you file articles of dissolution with the secretary of state in the state where you formed the entity you 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.
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.
But no matter what, the form you use is pretty simple. To give you one example, check out the dissolution form used for a California LLC. For California, as with basically every other state, all you need to do is fill out a little questionnaire and provide some general information about the dissolution.
Another Dissolution Option for "LLC" S Corporations
When you dissolve the LLC or corporation, you terminate the corporation's or the LLC's existence. And since you need something like a corporation or LLC to have an S corporation, killing off the LLC or corporation shuts down the S corporation.
However, if you use an LLC as the platform for your S corporation, you have another method for shutting down the S corporation--and one you should carefully consider.
With an S corporation built on top of an LLC, you can usually make an election to treat the LLC as either a disregarded entity or as a partnership as long as you've been an S corporation for at least five years.
This election, which you make using a Form 8832, creates a deemed liquidation of the corporation.
Everything I talk about in the paragraphs that follow still applies. But here's the thing. Legally, the LLC still exists.
You may want to continue with the LLC if whatever venture you operated inside the S corporation is still sort of active (just not active enough to merit the costs and hassles of operating as an S corporation).
You may also want to continue with the LLC if whatever venture you operated inside the S corporation is potentially creating liability you or your attorney think an LLC will minimize.
Note: Mechanically, once you make the 8832 election and so convert your S corporation to a disregarded entity (probably taxed as sole proprietorship) or to a partnership, you'll need to file tax returns for the LLC in that other new way. For example, you may need to report the activity on a Schedule C inside your regular 1040 tax return. Or you'll need to report the activity on a partnership return. But your S corporation's life will be over.
Distributing Assets to Shareholders
Any assets your S Corporation owns at the time of liquidation need to be distributed to shareholders. And then those distributions need to reported on the final tax return and K-1.
Note: If you use the 8832 form to shut down an LLC taxed as an S corporation, you don't actually have to physically distribute the assets. But your accounting and tax returns will show such a distribution has occurred. (This accounting is called a "deemed liquidation" or "deemed distribution.")
Okay... some wrinkles exist here. First of all, if an asset's fair market value exceeds its depreciated basis, you will unfortunately need to calculate and then 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 when the laptop is worth $100, you need to book a $100 gain on the distribution. The gain equals the excess of fair market value of the laptop over the $0 basis.
A 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. Or, for stuff that's worthless, have the S corporation discard the assets.
And a general accounting task you want to take care of. All of this asset disposal stuff and the distributions stuff needs to be reported in your accounting system so it can be correctly reflected on your final return.
I'm going to talk about that final tax return in a minute. But you want your final balance sheet (which will also be part of your final tax return) to show that the S corporation doesn't have any assets.
Paying Final Expenses
You'll often have final expenses related to shutting down an S corporation: charges for some help from your attorney, invoices from the tax accountant, and so on.
You want to either pay these before the year ends (which will mean the expenses automatically get into the books and so appear on the tax return). Or you'll need to come up with really good numbers for these final expenses so they can be accrued and added to the books and the tax return.
One way or another, though, you want to get these expenses onto the final S corporation tax return where they represent robust tax deductions. You won't want, in comparison, to miss $5,000 of final expenses (and a $5,000 tax deduction.)
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." That final return should report all the last expenses of winding down the business. And its schedules (like the Schedule L balance sheet and the Schedule K) should show the assets being liquidated and the funds being distributed to shareholders.
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. Note that the 966 isn't part of your final 1120S tax return. It's a separate discussion you make.
You also want to file your last payroll tax returns in a manner that indicates the S corporation has stopped paying wages. (This will probably be the last quarter's 941 return.)
Oh, one other thing: Remember that someone will need to prepare and send out the 1099s the S corporation owes independent contractors and the W-2s the S corporation owes employees.
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.
One of the most powerful tactics for saving small business taxes is maximizing your deductions. You can literally save thousands in taxes each year.Read More
Using an S corporation for your business? To maximize savings, you need to minimize the salary paid to shareholders. But this decision is tricky.Read More
Tax laws provide active real estate investors with giant tax planning loopholes. A little upfront planning on your part could save you thousands a year...Read More