An S corporation is an independent legal entity that owns business assets, such as inventory, equipment and real property. When shareholders decide it's time to close the doors, those assets must be liquidated to satisfy creditors. Any amount left over after the creditors are paid must be distributed to shareholders in proportion to their ownership interest. It is important that the liquidation follow a specific plan of action, and proper records of the sales must be maintained. Final federal tax obligations depend on whether an asset is sold at a gain or a loss, based on its original acquisition price.
1. Call a meeting of the board of directors of the S corporation. Vote to close the business and liquidate assets. Establish a liquidation plan and appoint a person to manage the process. Ratify the liquidation plan at a full meeting of shareholders by majority vote. Alternatively, if the bylaws of the S corporation establish specific provisions for liquidation, such as the percentage of shareholders that must agree to the action, the directors must follow the procedures stated in the bylaws.
2. Contact the creditors of the S corporation. The creditors have a say in the liquidation proceedings. Some may have security positions in business assets and those assets cannot be sold without satisfying the outstanding obligation. By law, secured and unsecured creditors must be paid first, before excess proceeds from the liquidation can be distributed to shareholders. Negotiate the creditors' agreement to the plan of liquidation and any debt settlement if it seems that liquidation proceeds will not satisfy all outstanding obligations.
3. Establish the liquidation value of the S corporation's assets. Create an inventory list with photos, descriptions, conditions and serial numbers of tangible assets. Hire a professional appraiser, if needed, to estimate the likely value of the assets at a forced sale. Typically, the liquidation value is approximately 20 percent below retail value. Separate out any asset with a value that makes putting it up for sale impractical and donate it to charity for the benefit of a tax deduction.
4. Arrange for the sale of the S corporation's tangible assets. Determine the method of sale that is most appropriate for each asset or category of asset. Auctions, direct sale to customers and competitors or private sales are all valid methods of liquidation. Hire a professional or a consulting firm to handle the process, if needed. Make sure each sale uses a non-recourse bill of sale that states the sale is final and merchandise is sold "as is" and cannot be returned.
5. Negotiate the transfer or assignment of intangible assets. Determine if the S corporation's intangible assets have value, including copyrights, trademarks, website domains, licenses, leases and permits. Engage an appraiser and hire an attorney to establish value and handle negotiations. Sign all paperwork to complete the transfer when a buyer is identified.
- New technology has made it somewhat easier to get the best prices when liquidating assets. Auctions can take place over the Internet, expanding the market for the merchandise and potentially raising the final sale price.
- Liquidating assets is only one step in the process of closing down a business. The way a corporation must end its existence and wrap up its affairs is prescribed by law in each state. If the law is not followed exactly, the shareholders can be held personally liable for debts and other obligations that arise years after the business closes.