Sometimes it is necessary to close up shop. If you are in this situation, you are probably wondering what, if anything, needs to be done about your taxes.
If your business is an S corporation, we have you covered. Below you’ll find an easy step-by-step guide to officially closing your business in the eyes of Uncle Sam.
Why Do I Need to Terminate My S Corporation?
First of all, you’re probably wondering why you need to do this. After all, if you’re no longer operating a business, you shouldn’t have any taxes to pay, right?
While that may be true, in the eyes of the IRS and your state, if you have not formally notified them that you have closed your business, then they’ll still be expecting you to:
- File inactive business annual reports with your state
- File state and federal tax returns
- Keep up with your business licenses (if you have any)
As you know, these activities will cost you money. Since you no longer have income from this business, then you definitely don’t want to be spending any more money on it.
When Do I Need to Terminate My S-Corporation?
If you are certain your business is closing, then you should officially terminate the business as soon as you can. Below are the simplified IRS guidelines for timing:
- If you can get this done by the end of your tax year, that’s the best idea.
- If it’s the beginning of your tax year, and you can submit the paperwork by the 16th day of the third month of your tax year, then you’ll be able to choose the first date of that tax year as your effective date. So, if your tax year is a normal calendar year, then you’ll need to get the paperwork filed by March 16 to have an official closing date of January 1.
- If it’s some other time during your tax year, then you can pick any date you want to be your official closing date. Just make sure the IRS receives your paperwork by whichever date you’ve picked.
Step-By-Step Guide to Terminating an S Corporation
Now that you understand why and when you need to terminate your S corporation, let’s get down to the how.
- Find your Articles of Incorporation document. This is the document that you filed with your state when you created your business. In it, you will find your guidelines for dissolution, if you have any.
- Next, you need to dissolve your LLC or corporation (depending on how you’re setup) with your state. If you have more than one owner/shareholder, then everyone will need to vote. Depending on what is written in your Articles of Incorporation or in your state’s statutes, you may need a majority vote, two-thirds vote, or unanimous vote in order to close. Whichever you need, make sure you write down the decision in meeting minutes or on a written consent form.
- Once you’ve made up your mind and/or the votes are in, you’ll file an Articles of Dissolution or Certificate of Termination with the Secretary of State in whichever state you started your business.
- Make sure you have paid all of your bills and sales tax (if applicable). You should have no outstanding debts with anyone.
- If you have any business licenses or permits, cancel those so you don’t rack up any more fees.
- Notify all of your clients, vendors, freelancers, suppliers, and contractors. Depending on the circumstances surrounding your closing, you may not feel up to this task, but it is the right thing to do. Plus, you might want to start a relationship again with some of them in the future. No reason to burn any bridges, right?
- Now it’s time to notify the IRS. You will need to notify them in writing. The IRS calls this a “letter to revoke subchapter S election.” There is no form or fee for this, but the IRS wants all of the following information in your statement:
- A statement that the corporation revokes the election made under Section 1362(a)
- Name, addresses, and taxpayer identification numbers (usually a social security number) of the shareholder(s)
- The number of shares of stock owned by the shareholder(s) and the date(s) when those shares were acquired
- The date on which each shareholder’s taxable year ends
- The name of the S corporation
- The S corporation’s EIN
- A statement that you are revoking the Subchapter S election
- Signatures of all shareholder(s) under penalties of perjury
- Signature and consent of shareholder(s) who collectively own more than 50% of the number of issued and outstanding stock of the corporation (whether voting or non-voting)
- Effective date of the revocation (or prospective date)
- Signature of person authorized to sign tax returns
- Finally, you still need to file a tax return and pay all taxes for the year your business closes. There is a checkbox on the first page of the tax return that you should mark to indicate this is your final return.
That’s it! Most S corporations won’t need a lawyer involved in these steps. However, if you have questions, it might be smart to consult with a CPA to ensure that you don’t miss anything.
No matter the reason for your business’ closing, there is no need to feel ashamed, discouraged, or overwhelmed when terminating your S corporation. You can’t start a new chapter in your life without putting a period at the end of the last one. You got this.