How to Close a Corporation in 6 Steps
Closing a business can be a difficult decision, but there are steps that can make the process easier and satisfy your legal obligations. When determining how to close a corporation, you will need to follow IRS guidelines as well as those laid out by your particular state. It’s important to note that state requirements vary greatly, so it may be a good idea to consult a business attorney or certified public accountant to make sure you’ve checked all the right boxes.
How to close a corporation: 6 steps
Step 1: Hold a board meeting
For some businesses, specifically sole proprietorships, closing down is a decision made by the owner. But if you want to dissolve an S-corporation or a C-corporation, you’ll need to get the approval of board members and shareholders. Instructions for dissolving your business should be spelled out in your corporation’s articles of incorporation or bylaws.
In addition to seeking approval for dissolution, this meeting can also allow members to determine how to move forward, including a plan for distributing or liquidating business assets.
Example: Dissolving a corporation in South Carolina
In South Carolina, the board of directors or a majority of incorporators may dissolve a corporation that has not issued any shares — they simply submit articles of dissolution to the South Carolina secretary of state. For corporations that have issued shares, shareholders entitled to vote must approve the measure.
Step 2: File articles of dissolution
Typically called articles of dissolution — though some states may refer to it as a certificate of dissolution — this document declares your company’s operational intentions to the state in which it’s incorporated. If dissolution documents are not filed, corporations will still be required to file and pay taxes to the state where it’s registered. (We’ll discuss federal tax requirements below.) Dissolution documents and guidance can typically be found on your state’s department of state website.
Step 3: Review labor laws
Depending on the size of your business, you may need to take into consideration both state and federal employee protection requirements, as well as those that apply within your particular industry.
For example, the federal Worker Adjustment and Retraining Notification (WARN) Act mandates that companies with 100 or more employees must provide at least two months (60 calendar days) notice of mass layoffs or plant closings. Some states may have their own WARN laws.
Example: Labor laws in Connecticut
Unless a closure is due to bankruptcy or natural disaster, Connecticut companies that close must provide health insurance for affected employees and their dependents, for 120 days starting with the date of closure. If an employee becomes eligible for insurance under another group, then the closing company is no longer obligated to provide insurance.
Step 4: File tax forms
It’s also important to consider how to dissolve a corporation with the IRS. When closing a business, the IRS typically requires businesses to do the following:
- File an annual tax return for the year in which they closed.
- File a final employment tax return.
- Make a final federal employment tax deposit.
- File returns that specify the distribution of corporate assets.
In addition to federal taxes, a corporation must also meet its state tax requirements. This includes state income taxes, as well as any sales tax collected.
Example: Filing final state taxes in Ohio
In Ohio, after a corporation has paid any applicable taxes and filed the necessary returns, it will need to obtain a Certificate of Tax Clearance in order to file for dissolution with the secretary of state. Corporations with more than 250 employees must file all employee W-2s no later than 60 days after their final payroll.
This certificate goes by different names in different states while other states don’t require one at all. In Missouri, for example, it’s referred to as a Certificate of No Tax Due.
Step 5: Close accounts, cancel licenses and remit final payments
Assuming you have fulfilled any outstanding jobs to your customers and you don’t have creditors, you may cancel any existing city, state or federal licenses and permits and meet any outstanding financial obligations that pertain to those entities. This is also the time to cancel accounts such as:
- Utility accounts
- Dissolved corporation bank accounts
- Corporate credit cards
- Vendor and supply accounts
- Miscellaneous accounts such as cable, satellite radio and other subscription services
Dissolving a corporation with debts
This step may take a significant amount of time and energy when dissolving an S-corp with debt or a C-corp with debt. If your debts exceed assets, this is another instance where you may need to consult the advice of a lawyer or certified public accountant.
“If the business is insolvent and creditors come for assets, there is a hierarchy of who gets paid and who does not,” said Patrick Feeney, a financial advisor based in southern Florida. An experienced lawyer or CPA can help make those decisions.
Keep in mind that corporations are often required to remit final payments to both known and unknown creditors. Many states require that businesses announce their dissolution intention so that creditors have a way to request payment.
Example: What to know in North Carolina
For instance, in North Carolina, a corporation alerts known and unknown claimants or creditors. Corporations should publish a general notice of its dissolution in its local newspaper where unknown claimants could see it and file a claim in writing.
Step 6: Liquidate or distribute assets
The process of winding up a corporation typically means disposing of or selling the business’s assets. In order to do this, a corporation must first take stock of its liabilities. These may include outstanding accounts, employee payroll and debts owed to creditors, as well as shareholders. Corporations must take care to properly report those efforts on IRS Form 966, and any form that may be required by its state. You may want to consult a business attorney to make sure you have filled out all of the necessary paperwork.
Example: Liquidating and distributing corporate assets in Utah
In Utah, corporations that have assets that belong to another party (specifically a claimant, creditor or shareholder) must be transferred to that individual or organization. However, if the corporation is unable to locate and subsequently transfer the asset to that individual or organization, the asset must be converted to cash and deposited with the Utah State Treasurer.
FAQs about closing a corporation
Should I dissolve my corporation?
The decision to dissolve a corporation depends on a variety of factors, but the health of your organization is probably the biggest one. Some business owners find that financial troubles or partner disagreements merit dissolution. Others, however, may simply decide it’s time to retire or pursue other interests.
There are alternatives to dissolution. You could sell your business or sell your share of the business to a partner. If you’re closing for financial reasons, identify new sources of capital (e.g., private equity, capital loans, etc). The worst thing you can do is to stop operations without formally dissolving. This leaves your corporation open to ongoing tax requirements and other liabilities.
Are there differences between closing a C corporation and an S corporation?
One of the primary differences between a C corp and an S corp is taxation. S corps are pass-through entities, where profits and losses are “passed through” the owners’ personal tax returns. A C corp, on the other hand, is its own taxable entity. As such, one of the major differences when discussing how to close a c-corporation and an s-corporation is final tax returns.
What’s the difference between closing a corporation and a LLC?
There are many similarities between the process for closing a corporation and an LLC. For example, in both cases, you must notify your state’s secretary of state. Typically, though, an LLC doesn’t have directors or shareholders, and therefore the decision to close is often one that comes down to the owner or owners. The process of closing an LLC can vary from state to state and may differ significantly from closing a corporation.
What happens to a business’s Employee Identification Number when a corporation is dissolved?
Once you apply for and receive an Employee Identification Number (EIN), that number is permanently associated with your business, whether you are still filing tax returns or if you’ve dissolved that business — in short, you can’t “cancel” your EIN. Exempt organizations can, however, close their business account with the IRS by sending them a letter requesting account closure.
How long does it take to close a corporation?
It generally takes nine months to a year to close a corporation. In some states, however, that process can take longer, up to two years.