Dissolve Your Corporation In Four Easy Steps

The terrible economy of the last two years has added yet another task to some entrepreneur's to-do lists: dissolving a corporation because a business has terminated.

Fortunately, while dissolving a corporation may be unpleasant, the task often isn't too terribly difficult. When you dissolve a corporation the right way--usually because you no longer need the corporation for a business or investment--you simply take the following four steps:

Step 1: Liquidate assets and pay off debts

In general, you'll want to liquidate (or selloff) the assets of the corporation and use any proceeds to pay down and payoff the debts of the corporation. A tip--you want to do the lion's share of this liquidating inside the corporation so that liquidation gains and losses are unambiguous and clear.

In a situation where you distribute assets to shareholders (an old vehicle, a laptop computer and so forth), you'll need to calculate solid estimates of the difference between the asset's fair market value and its book value, reporting any difference as a gain or loss.

Note: If an asset is carried on the books at less than its fair market value--say the asset has been fully depreciated but has some liquidation value--the corporation needs to recognize a gain equal to the difference if it gives the asset to a shareholder. Similarly, some item is carried on the books at greater than its market value, the corporation recognizes a loss equal to the difference if it distributes the asset to a shareholder.

Step 2: Distribute any remaining assets to shareholders

Any assets you have left over should be distributed to shareholders after the internal liquidations (described in step 1) take place.

Furthermore, if you will pay lawyers and CPAs fees for helping you stop the corporation, you should disburse these amounts at this time, too.

When you complete step 2, however, the corporation should have no assets and no liabilities.

Step 3: File articles of dissolution

The state where you formed your corporation will require you to file articles of dissolution--and usually states provide a simple form for doing this at their secretary of state web sites. The articles of dissolution resemble the original incorporation paperwork and document that the board of directors and possibly shareholders have authorized the cancellation of the corporation.

Note: In some states, the dissolution process may also require a dissolving corporation to get an "all clear" report or certificate from the state tax authority.

Step 4: File final tax returns

After the corporation dissolves, the final corporation tax return needs to be filed. The final federal corporation tax return needs to be marked as the "final" return and should include a 966 form. Note, too, that the tax return should show all of the corporation's assets as either being sold off (see step #1 above) or distributed to shareholders (see step #2 above).

If your corporate return includes balance sheets on page 4 (see Schedule L in the 1120 or 1120S return) because either the assets or the annual revenues exceeded $250,000, verify that your ending balance sheet documents the complete liquidation of the firm. In other words, you want the final balance sheet values shown in the tax return to clearly indicate that the corporation's assets and liabilities have all been liquidated.