Liquidating an s corporation

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It may take some time to close down your business and dispose of all your business assets.

Before your corporation can truly cease to exist, it must wind up its business affairs.

State business codes specify the procedures corporate managers must follow to execute the legal termination and asset liquidation of an S corporation. Obtain a vote and decision to dissolve the S corporation from shareholders.

State laws commonly require the managing parties of an S corporation to initiate state dissolution procedures only when authorized by shareholders. Stop conducting business on behalf of the S corporation being dissolved.

The focus of the managers of an S corporation must turn to legally dissolving the business and liquidating assets within a reasonable period of time.

The only exception to ceasing operations is limited to communications and transactions necessary to dissolve the business.

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THE PRACTITIONER SHOULD ADVISE the client to terminate employment and noncompete agreements with shareholders before liquidation.A common motivation for structuring a transaction as an asset sale is so that the buyer can acquire the business and enjoy a step-up in tax basis in the depreciable/amortizable assets, while leaving the seller’s operating history (and potential legal liabilities) behind.In this case (where outside tax basis is significantly higher than inside tax basis), it is critically important that the asset sale AND the liquidation of the S corporation both occur in the same tax year (generally the same calendar year).For example, Texas law allows S corporations engaged in a dissolution process to file for or continue engaging in any pending administrative, criminal or civil legal proceedings in connection with dissolution or other outstanding legal matters that existed before the process began.Dissolution does not exempt the S corporation from legal proceedings that predate the start of the termination process. Notify each creditor in writing of the dissolution of the S corporation.

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