Dissolution (Corp.)

The procedures governing how a corporation goes out of business depend on your state's law -- just like the formation did. Generally, a corporation can close down voluntarily by agreement of its shareholders if more than 50% of the shareholders vote to quit.

Normally, a state requires a dissolving company to first fill out an application for tax clearances to ensure that the corporation paid all required taxes, such as payroll, unemployement and corporation income taxes. Of course before this application, all tax returns should be completed and filed with required taxes. Once this application is filed with the state, the state checks with various its departments to ensure that all taxes are collected. If there is no problem with taxes, then this a corporation receives a certificate of good standing from the state. With this certificate, a dissolving corporation fills out a certificate of dissolution and files it to the state along with the certificate of good standing. Once these are filed, the state finally approves the dissolution either by stamping its receipt mark on the certificate of dissolution or issuing its version of certificate of dissolution with a gold seal. This process generally takes about 2 - 3 months.

A corporation can also cease to exist involuntarily “by operation of law” -- such as from a deadlock of shareholders or nonpayment of annual corporation fees.

Neglecting to keep up with state filings is the most common way small corporations die. While it is relatively easy to kill a corporation, if you suddenly stop filing corporation tax returns, expect an IRS inquiry. Special tax code provisions deal with corporate liquidations. Typically, the specter of “double taxation” arises if the corporation has assets which are distributed to the shareholders. For instance, a sale of the business's assets and a distribution of the proceeds to the shareholders may mean the corporation owes tax on any gain on the sale. Moreover, shareholders may owe tax again on the money received. Keep in mind that if any tax benefits, such as depreciation on assets, have been claimed by the corporation in the past, the basis in the corporate assets may be very low or even zero. Technically, corporate tax depreciation deductions previously taken are considered “recaptured” on dissolution and are now taxed. The result may be unexpected taxable gain even when assets are disposed of for minimal amounts.

If the business failed miserably and everyone took a bath, it may be that no one has a taxable gain. But this is probably a time you'll want to consult to tax accountants for you and the corporation. IRS Form 966, Corporate Dissolution or Liquidation, must be filed with the IRS whenever a corporation is terminated. (For more information, see IRC 331 and following sections (recipients), 336 and following sections (corporations), Reg. 1.331, 336.)

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