How to Close an S Corp With the IRS
Registering as an S corporation allows business owners to pay themselves as employees of their own company, and to deduct expenses for travel and equipment used in the daily course of the business. However, there may come a time when you decide to close your S corporation. The Internal Revenue Service (IRS) has some strict regulations about how to legally dissolve a corporation, which effectively means that afterward the company no longer exists.
Before closing down, you must file an "intention to dissolve" document with your state if your S corporation issued shares during the course of doing business. The document lists the name of your business, the date that you decided to dissolve, a declaration that shareholders approved of the dissolution and a confirmation that you will file articles of dissolution under the corporation requirements of the state where the business is incorporated.
In most states, S corporations are established through the secretary of state’s office, which means before you can close an S corporation with the IRS, you must first give notice to the state where your business is incorporated that you intend to dissolve the company.
This is known as filing articles of dissolution; in many states, you have to publish these articles in a local paper for a specific number of days. The public notice gives creditors the opportunity to file a claim against you for outstanding debts prior to the liquidation and distribution of your company’s assets.
The IRS requires S corporations to file form 966, Corporate Dissolution or Liquidation, within 30 days of adopting a corporate resolution to dissolve. The form requires you to list the name and address of the corporation, the date it was incorporated, the place where it was incorporated, the date you decided to dissolve the company and the month and year of the corporation’s final tax term. You must also provide the total number of outstanding shares (if any) at the time you decided to dissolve the business.
File the form with the IRS Service Center where your corporation usually files its tax return.
You must file a final tax return for your S corporation using form 1120S, and check the box next to the words “Final Return” at the top of the document. This informs the IRS that you’re dissolving the corporation and that it will file no further tax returns.
You must also file forms 940 and 941 (if applicable) for a final time. Form 940 is the Employer’s Annual Unemployment tax return. Form 941 is the Employer’s Quarterly Federal Tax Return document that is required if you pay estimated taxes.
Pay any outstanding fees that the S corporation owes to the state where it’s incorporated, and distribute final assets and/or shares to stockholders. You have to resolve any outstanding debts or claims against the corporation before you can distribute final assets and shares.