How To Dissolve Your Corporation in Seven Steps

It’s never an easy decision to close a company and abandon the dream you were building. And having to meet the final obligations to close cleanly and remove all potential liability is not a fun situation to be in, so at GBS, we make the tax filing for final returns as simple and inexpensive as possible.Here are some tax considerations when dissolving.

Step 1: File all delinquent tax returns

First thing to do when thinking about closing your corporation is to file all tax returns and pay all tax balances, including any penalties, fees, and interest. This includes state returns and taxes owed- like Delaware Franchise Tax and CA Minimum tax. GBS can help you file these taxes, and we have a Clean-Up Bookkeeping Service available if you need to get months or years of books in order before you file.

It is important to note that Delaware will never close a corporation for non-payment of taxes. While they currently don’t actively pursue companies for back franchise taxes, there is always a risk that they may come after the shareholder and decision makers in the future. Thus, it is recommended to pay up all taxes and close the company by dissolving with Delaware state when ceasing business.

Step 2: Dissolve with the state

The next piece is to legally close the corporation in the state of formation. There are two steps to doing this correctly. The first is to have a board resolution drafted that shows the vote to the to dissolve the company.Then, after the decision has been ratified, the articles of dissolution are filed with the state to formally terminate the corporation.

Generally, these documents require the help of an attorney to prepare. Thus, you will want to have the articles of dissolution and board authorizations prepared by an attorney for filing with the secretary of state. You can use a lawyer for corporate dissolutions who provides a high level of service for a fair price for GBS clients.

Step 3: Stop Doing Business

This may seem obvious, but once you close your business that should be the end of receiving income from it. You shouldn’t be transacting business after the date of closing. Expenses that are paid after the business closes and prior to filing the timely filed final tax return can still be deducted on that final return and offset any income.

But any income received after the company closes will create an unincorporated business requiring an additional tax filing. This will result in needing an independent contractor tax return, if only one owner this means filing Schedule C included with the personal tax return, or a partnership return filed on Form 1065 if the company has more than one owner.

Step 4: File form 966 with the IRS

It is required to file form 966 within 30 days of closing the corporation. This form can be prepared by the attorneys filing the dissolution documents. However, as this is a requirement of closing, it is important to file with the IRS. GBS has a Final Return Package, which includes Final Federal tax return, one state return, Form 966 (required within 30 days of dissolution),and your EIN cancellation letter upon Federal return submission.

Step 5: File an Extension

One of the hardest pieces about final income tax returns is simply filing at the right time. The corporate income tax return is generally due three and a half months after the month the company dissolution is filed by the state. The problem is that states don’t always file the dissolution documents right away when submitted. We have seen them file the final date, weeks, even months, after filing.  

Until recently, we recommended waiting until receiving the stamped dissolution documents prior to filing taxes. However, a new challenge has come up now, where it is taking 18+ weeks now for some states to return dissolution documents. Thus we now recommend filing an extension after dissolution, based on when the dissolution was submitted.

It is important to make sure that the return isn’t late when it is filed as certain penalties can be very steep for filing late, including the$25,000 penalty if form 5472 needs to be included. GBS will file an extension for you if needed as part of the Final Return Package, as sometimes it can take weeks to get the Certificate of Dissolution from your State

Step 6: File Your Taxes

After receiving the stamped dissolution documents, file the final/current year federal and state income tax returns. Returns should always be marked “Final Return” when they are filed and should use fiscal year dates ending at the date of dissolution, but this is just the start of what needs to be looked at for filing a final tax return properly. Certain transactions can create the requirement to include form 5472 for foreign shareholders, and debt can create taxable income in the year of dissolution or trigger information returns. Even though these returns are often far more complex than a standard tax year, at GBS we discounted our Final Tax Filing Package, to help you through this challenging time.

If there were payouts made from earnings and profits, the information returns reporting the dividends on 1099-DIV or 1042-S will also be required, and repayments of loans could trigger the need for 1099-INT to be filed. SAFE notes remaining unpaid at dissolution generally don’t create cancellation of debt income, but it depends on the terms of the agreement, and if any partial payment was made out prior to closing, thus this needs to be reviewed carefully.

Step 7: Tax ID Forfeiture

Another requirement of closing a company is to write a letter to the IRS requesting that the Employer Identification Number (EIN) assigned to your company is removed from their system. This way it prevents the IRS sending requests for tax returns for later filing years. If you need help with this letter, GBS provides it as part of our Final Tax Filing Package, and mailing it to the IRS is included in that service.

If you have registered to do business in any states other than the state of incorporation, you will need to withdraw or surrender your foreign qualification in that state. Each state has a process for doing this, and you may want to have the dissolution attorney file this for you. Oftentimes, you cannot surrender registration in the state until the final tax return for that state has been filed.  Most states allow for up to a year after closing the business to withdraw the state registration.