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.For example, you could include a provision stating only corporate officers can vote for a liquidation plan or that the corporation must hold a meeting of shareholders before the liquidation plan is approved.If your bylaws give your officers authority to approve dissolution and establish a liquidation plan, the consent of a majority of officers is typically required to begin the dissolution and liquidation process.The major reason for converting to a pass-through entity is to allow the S corporation to recognize any built-in loss associated with the asset and pass the loss onto the S shareholder.The shareholders attempt to increase their basis in the S stock by the amount of liabilities assumed, thus allowing the deduction of losses that would otherwise be suspended.While “complete liquidation” is not defined by the Internal Revenue Code, IRS regulations suggest that your corporation enters liquidation status when it ceases to be a going concern and, instead, corporate activities are mainly for the purpose of closing down the business, paying corporate debts and distributing remaining assets to the shareholders.You can draft your corporation’s bylaws to describe specific processes for liquidation and dissolution.
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.
State laws establish dissolution procedures that ensure shareholders can close down the business without worrying about lingering liability for matters that may come up long after the corporation has shut its doors.
Most states require that an S corporation authorize a person or team to file the company's articles of dissolution with the appropriate state agency and wind up its affairs.
According to the IRS, it is seeing these conversions where the S corporation's primary business is property development or homebuilding.
Often the current fair market value of the property is lower than the outstanding liability associated with the property.