How to Dissolve a Corporation

Step 1: Adopt a Board Resolution

Dissolution starts with the board of directors adopting a resolution recommending dissolution, often along with a proposed plan of dissolution describing how the corporation's affairs will be wound up and its remaining assets distributed. Document this resolution in the corporate minutes, since it's the formal starting point for everything that follows, including the IRS filing deadline discussed below.

Step 2: Get Shareholder Approval

After the board acts, shareholders generally have to approve the dissolution, typically by a majority of the shares entitled to vote, though your bylaws or your state's corporation statute may set a higher threshold, such as two-thirds. Hold the vote at a shareholder meeting or through written consent if your bylaws allow it, and keep the signed approval with your corporate records.

Step 3: File IRS Form 966

A corporation that adopts a resolution or plan to dissolve must file Form 966, Corporate Dissolution or Liquidation, with the IRS within 30 days of adopting that resolution, according to the IRS. This is separate from, and earlier than, your final tax return, so it's easy to miss if you're focused on the state filing and the final return instead.

Step 4: Wind Up the Corporation's Affairs

Winding up a corporation follows the same basic logic as winding up any business: notify known creditors and give them a chance to submit claims, pay outstanding debts and obligations to the extent assets allow, collect any money owed to the corporation, and distribute what's left to shareholders according to their ownership. Some states let a corporation file its Articles or Certificate of Dissolution before winding up is complete; others expect winding up to be substantially finished first, so check your state's specific form.

Step 5: File Your Final Federal Tax Return

File a final corporate income tax return, Form 1120 for a C corporation or Form 1120-S for an S corporation, marked as a final return. An S corporation issues a final Schedule K-1 to each shareholder. If the corporation had employees, file final employment tax returns, including a final Form 941 or 944 and a final Form 940, issue final W-2s, and file any required Form 1099-NEC for contractors. The IRS states plainly that it cannot close a business's account until all required returns are filed and all taxes owed are paid.

Step 6: File Your Certificate of Dissolution With the State

Every state has its own filing to end a corporation's existence, commonly called a Certificate of Dissolution or Articles of Dissolution, filed with the Secretary of State or equivalent office. The fee for this filing is set separately by each state for corporations, independent of whatever that state charges an LLC to dissolve, so confirm your specific state's current corporate fee before you file. Some states, including Texas and Tennessee, require a tax clearance certificate from their revenue agency before they'll process a corporate dissolution.

Step 7: Handle State Tax Accounts, Licenses and Foreign Registrations

Separately from the state filing office, close any sales tax permit, employer withholding account, or unemployment insurance registration with your state revenue or labor agency, and cancel business licenses tied to the corporation. If the corporation is registered as a foreign entity in other states, file a withdrawal in each one; otherwise it keeps owing that state's periodic report fees.

How Shareholders Are Taxed on the Final Distribution

When a dissolving corporation distributes its remaining assets, shareholders generally treat what they receive as if they'd sold their stock, reporting a capital gain or loss based on what they receive compared to their basis in the stock. This is a general description, not a substitute for guidance on your specific situation, especially if the corporation is distributing property rather than cash.

Don't Skip the Board-Then-Shareholder Sequence

A dissolution approved only by the board, without the shareholder vote your state or bylaws require, generally isn't valid. Confirm your specific state's corporation statute and your own bylaws for the exact vote threshold before you file anything with the state.

Form 966's 30-Day Clock Starts at the Resolution, Not the State Filing

Because the Form 966 deadline runs from when the board or shareholders adopt the resolution to dissolve, not from when you eventually file with the state, it's possible to miss this deadline while still working through winding up. Calendar it the same day the resolution is adopted.

An S Corporation Has Extra Considerations

An S corporation's final Schedule K-1s and the character of the final distribution to shareholders, ordinary income versus capital gain, can get complicated, particularly if the corporation holds appreciated property. This is worth a tax professional's review before you distribute anything.

This Is Not Legal or Tax Advice

Corporate dissolution involves state corporate law questions about required votes and creditor notice, and federal tax questions about the character of the final distribution. Talk to a business attorney about the winding-up and shareholder-approval steps, and a tax professional about the final returns and the tax treatment of the liquidating distribution.