January 20, 2021
How to Deal with the Closure of Your S-Corporation
You have decided it is time to close your business and you are wondering what you need to do to make that happen. While it may seem like you should be able to just cease operations, close your doors, and walk away, there are specific steps you need to follow in order to protect yourself from any potential liability.
The team at Formations is here to ensure you take all the necessary steps to close your business. Some of these steps will vary based on your business structure. A sole proprietorship is simpler to close than a corporation. However, for our purposes today we will assume that you have a Limited Liability Company that has elected S-Corporation status. Before you withdraw any assets from the company or notify state and federal organizations, make sure to do the following.
Closing the Business
Make the Decision to Dissolve
The first step in closing your business is to make the decision to cease operations and dissolve your business. If you are a single-member LLC, this is relatively easy. However, if you are part of a multi-member LLC you will most likely call a meeting to vote on the dissolution. Each state and your company's operating agreement will dictate the requirements for the vote. You may need a unanimous, two-thirds, or majority vote to dissolve the company.
Dissolve with the State
The next step is to dissolve the LLC with the state. Each state has a different process, but it generally involves, at a minimum, filing Articles of Dissolution with the Secretary of State. Check with the Secretary of State where your business operates to determine the specific forms required to dissolve your business.
Provide Notice
Provide notice to any creditors that you are in the process of dissolving the company. Make sure that the assets of the company are sufficient to pay for any outstanding debts. Some states will require public posting of an official notice of dissolution, such as via a newspaper ad, so check local requirements to ensure compliance.
Pay Your Bills & Protect Yourself from Potential Liability
This is the time to close the books and pay any bills. Make sure to keep some funds set aside for unplanned future expenses that may occur, such as with the final quarterly payroll withholdings. Pay any debts and taxes. Distribution of company assets to the member(s) cannot occur until all liabilities are paid. The member(s) will be personally liable to creditors of the company for unpaid debt.
Close any other accounts, such as utilities, pay final balances due, close vendor accounts, and notify any customers that the business is closing. Be sure to collect any outstanding payments from your customers. You need to notify employees and set aside funds for the final payroll cycle. Some states may require that you pay your employees for any unused vacation time, so you need to account for that expense.
Complete any Required Tax Filings for the Final Year
See below for how to file the final tax return when closing your S-Corporation with the IRS.
Cease Operations & Shut Down Accounts
After paying the bills, you can close the business bank accounts. You will want to cancel any insurance policies, licenses, permits, and registrations held in the company name. Leaving an account open might allow someone else to use them without your knowledge.
Divide the Assets
The final step is to divide the remaining assets to any member(s). The operating agreement should provide guidance for distributing these assets. Transferring property owned by the company to the member(s) will not occur until the company is closed.
Closing Your S-Corp with the IRS
When you opened your business, you submitted Form 2553 to elect the subchapter S-Corporation election. There is a process you must take with the IRS to let them know your business is dissolving.
File the Final Tax Return
Regardless of your business structure, you must file a final tax return in the year you close your business. A California sole proprietorship will file a Schedule C, a partnership will file Form 1065 and a corporation will file an 1120. These forms will have a box labeled “Final Return” that you must check.
S-Corporations, file Form 1120-S, U.S. Income Tax Return for an S-Corporation. Check the “Final Return” box located on the top of the first page below the entity information. You must mark the “Final Return” box on the Schedule K-1, Shareholder’s Share of Income, Deductions, Credits, Etc.
Additional Forms with the IRS
If, as part of your business closure, you have adopted a plan or resolution to dissolve the corporation or liquidate the stock, you must submit Form 966, Corporate Dissolution or Liquidation. If you sell or exchange any business property you will file Form 4797, Sales of Business Property. Schedule D of the 1120-S reports capital gains and losses. And, if you sell the business rather than dissolve it, you will file Form 8594, Asset Acquisition Statement.
Wrap-Up Employer Responsibilities
File the final quarter’s Federal Form 941, the Employer’s Quarterly Federal Tax Return (or the 944 if you were an annual depositor), the annual Federal Form 940, the Employer’s Annual Federal Unemployment (FUTA) Tax Return, and the annual Form W-3, Transmittal of Income and Tax Statements, and Form W-2, Wage, and Tax Statement for each employee.
If your employees receive tips file the final return Form 8027, Employer’s Annual Information Return for Tip Income and Allocated Tips. And if you provide any employee benefits file the final return for Form 5500, Annual Return/Report of Employee Benefit Plan.
Pay Any Owed Taxes
Because S-Corporations are pass-through entities, shareholders will pay corporate taxes for the final return on their personal tax returns.
As an employer, you must schedule the final deposits for all payroll tax liabilities and withholdings.
Report Any Payments to Contractors
Any independent contractor that you paid more than $600 in a calendar year should be issued a Form 1099-NEC, Non-employee Compensation. You will file Form 1096, Annual Summary and Transmittal of U.S. Information Returns with the IRS.
Close the IRS Business Account
To close your business account with the IRS you will draft a letter that includes the following information: complete legal business name, business EIN, business address, and a reason for requesting the closure of the account. Your business EIN is a permanent number tied to your business and cannot be closed.
Maintain Records for Traceability and Accountability
Business records should be maintained for several years, even after the business has closed. Keep payroll reports (941, 940, W-2s, etc.) for a minimum of four years. Tax returns should be kept for a minimum of seven years. Business records involving property should be kept until the period of limitations expires. Other business documents should be kept for a minimum of three years.
Closing Your Business at the State Level
Every state has specific requirements for dissolving the business. Generally, all states will require filing a dissolution document, filing a final tax return, closure of any state licenses, permits or registrations, and payment of any tax liabilities.
Dissolve Your Business
To dissolve your business, you will file some form of dissolution, often called the Articles of Dissolution, generally with the Secretary of State. This will dissolve the limited liability company or corporation but may not cancel any state business licenses.
Close any State Accounts
There may be several state accounts to close, based on where you operate and what type of business you have. Employers may need to close a state payroll account, unemployment insurance account, and worker’s compensation account. Vendors that collected sales and use taxes may need to cancel the sales tax account or seller’s permit. If you obtained a business license in the state, county, or city where you operate, you need to close those accounts. Failure to close all applicable accounts could leave the door open for someone else to use the accounts or permits and leave you with a hefty financial burden which you could be personally liable for.
File Final Returns
If you operate in a state that has required annual business tax returns you will file a final return for the business. This is generally done by marking the return as a Final Return. Depending on the state, you may need to file a final return for franchise taxes, sales, and use taxes, and payroll taxes.
Pay any Tax Liabilities
Be sure to pay any outstanding liabilities with various state agencies. This may include state taxes, business taxes, franchise taxes, sales, and use taxes, or payroll taxes. A best practice is to request a letter of good standing as you close accounts and pay liabilities.