Deciding to close an S-corporation is a complex and emotional process that requires careful consideration of the accounting and tax implications. This blog post aims to guide you through the essential steps an S-corporation must take from an accounting and tax perspective to ensure a smooth, legally compliant closure.
- Consult with a tax professional and accountant. Before taking any steps, consult with an experienced tax professional and accountant who are familiar with the unique accounting and tax requirements of S-corporations. They can guide you through the process and ensure you meet all legal and financial obligations.
- Hold a shareholder meeting and vote to dissolve. Convene a meeting of the shareholders and obtain a formal vote to dissolve the S-corporation. This decision must be documented in the meeting minutes and filed with the corporation’s records.
- File Articles of Dissolution Submit Articles of Dissolution with your state’s Secretary of State office to officially terminate your S-corporation. The requirements and fees vary by state, so consult with your legal advisor to ensure proper handling.
- Notify the IRS and state tax authorities. Inform the Internal Revenue Service (IRS) and your state tax agency of your S-corporation’s dissolution. File Form 966, Corporate Dissolution or Liquidation, with the IRS within 30 days of the dissolution vote.
- Prepare final tax returns. Work with your accountant to prepare and file the S-corporation’s final federal and state income tax returns. Mark the return as “Final” and include the date of dissolution. Don’t forget to file any payroll, sales, and excise tax returns, as required.
- Allocate income and deductions among shareholders. Distribute the S-corporation’s income, deductions, credits, and other tax items among shareholders according to their ownership percentage. Shareholders will report these items on their individual tax returns using Schedule K-1 (Form 1120-S).
- Settle outstanding tax liabilities. Pay any outstanding federal, state, and local taxes, including payroll, sales, and excise taxes. Be sure to obtain tax clearance certificates from the appropriate agencies, as this may be required by your state when dissolving the S-corporation.
- Liquidate and distribute assets. Liquidate the S-corporation’s assets, such as equipment, inventory, and real estate, and use the proceeds to pay off creditors. Any remaining assets must be distributed to shareholders according to their ownership percentage. Keep in mind that shareholders may need to report the distribution as income on their individual tax returns, depending on their basis in the S-corporation.
- Close bank accounts and cancel contracts. Close all business bank accounts, credit cards, and lines of credit associated with the S-corporation. Cancel contracts, leases, and other agreements, ensuring all termination requirements are met.
- Maintain records. Retain S-corporation records, including financial, tax, and shareholder information, for the required length of time as mandated by federal, state, and local laws. This is essential for future reference and to address any legal or financial issues that may arise.
Conclusion: Closing an S-corporation requires careful attention to accounting and tax matters to avoid complications and ensure compliance with the law. By working closely with professional advisors and following the steps outlined above, you can navigate the dissolution process with confidence, knowing you have fulfilled your legal and financial obligations.