An S Corporation’s existence may end either willingly or involuntarily. When a S Corporation is terminated, the IRS ceases to recognize it as a distinct entity for taxation reasons. Understanding the situations that can result in a S Corporation termination is crucial since doing so has major tax ramifications. Voluntary S Corp Termination
When the owners of the company choose to voluntarily end the S Corporation status, it is referred to as a voluntary S Corporation termination. The decision to dissolve the S Corporation may be made by the firm’s owners for a number of reasons, including corporate restructuring, company mergers, or conversion to another entity form, such as a C Corporation or Limited Liability firm.
The owners of the company must approve a resolution to dissolve the corporation in order to voluntarily end a S Corporation. A majority of the shareholders must vote in favor of the motion. The IRS must be notified of the corporate dissolution or liquidation by filing Form 966. The IRS is informed of the corporation’s dissolution by the filing of Form 966, which also contains details on the last tax return that needs to be submitted. Termination of Involuntary S Corporation When a company no longer satisfies the criteria for maintaining its S Corporation status, the S Corporation status is involuntarily terminated. When a S corporation has more than 100 shareholders, this is the most frequent cause of an involuntary termination. When a shareholder is ineligible to be a S Corporation shareholder, a S Corporation may be terminated involuntarily.
Which of the Following Is Prohibited from Owning Shares in a S Corporation? The corporation must continue to satisfy certain qualifying standards in order to keep its S Corporation status. The shareholders must be either individuals, estates, specific trusts, or tax-exempt organizations in order to qualify as shareholders. The following organizations are not permitted to own shares of ownership in S Corporations: Corporations, partnerships, nonresident alien shareholders, and LLCs that have not chosen to be taxed as C corporations or S corporations fall under this category. Finally, a S Corporation may be terminated freely or unwillingly. An involuntary termination occurs when a corporation no longer satisfies the eligibility requirements to preserve its S Corporation status, whereas a voluntary termination occurs when the firm’s owners opt to dissolve it. To prevent an unintentional S Corporation termination, it is crucial to comprehend the eligibility requirements for S Corporation shareholders.