Handling the Distribution of Assets in Liquidating an S-Corporation

Dissolving an S corporation and liquidating its assets is more complicated than it may seem at first. When you're going out of business, your board of directors has a legal duty to maximize the value of the corporation's assets while trying to get rid of everything as quickly as possible. Ultimately, state law governs the way liquidated assets are distributed to your company's stakeholders.

Dissolving Under State Laws

  1. While your S corporation has a special tax status for federal taxpaying purposes, it's still governed by the laws of the state in which it is incorporated. 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.

Liquidating Assets

  1. 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. Liquidating the corporation's assets is a large part of that process. It involves valuing the company's tangible and intangible property, preparing it for sale and choosing the best sales method for each property type. The person responsible for this task has a legal duty to maximize the value of the assets, so he can't just give them away for a pittance or sell them to inside parties at a discounted price. However, the liquidation value of assets is typically only a fraction of the fair market value because liquidations often happen under time constraints that give the buyer the advantage.

Ordering Payments

  1. Once you've turned your equipment, inventory and client lists into cash, you can't just shut the doors and pocket the money. S corporations that are going out of business must pay off all known creditors first out of the proceeds of the liquidation and to allow enough time for unknown creditors to make a claim. Most states also require dissolved corporations to set aside enough money to pay any potential debts that are still in dispute at the time the business closes in case the resolution of the matter isn't in the company's favor.

Distributing Assets to Shareholders

  1. Liquidated assets that remain after creditors have been satisfied must typically be distributed to shareholders of record on a per share basis. S corporations are required by the federal tax code to have only one class of stock, so all shareholders have equal rights to distributions from the remainder. For example, if the corporation has 100 shares of stock outstanding and $1,000 to distribute as profit, each share should be allocated $10. The shareholders would get a proportionate share of the remainder based on how many shares each holds. S corporations are small businesses that sometimes have absentee shareholders. If a shareholder is still an owner of record, however, he is entitled to his cut of the remainder, even if the shareholder is no longer on good terms with the company.