Tax implications of liquidating a corporation

An S corporation is a regular corporation that has made a special election with the Internal Revenue Service to pay taxes as if it was not a corporation.

Although S corporations have special tax status, they operate like other corporations in many ways since they are still legally a regular corporation under state laws.

Thus, changing ownership in an S corporation requires transferring stock in the corporation.

Once you file the appropriate documentation to create a legal corporation in your jurisdiction, state and federal law will recognize the corporation as an independent entity.

Each of these actions produces potentially taxable events at the corporate and individual shareholder levels.

The owners of a C corporation may be interested in converting the company into a limited liability company, or LLC.

The shareholders will then transfer the assets to the newly created LLC.

This liquidation results in an initial tax on the corporation for any gains on the property.

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Possible reasons requiring liquidation are the closing or sale of the business or changing the business structure to provide more favorable tax treatment.These taxes can be significant if the corporation and shareholders own primarily intellectual property, such as a secret recipe, that had no value at the time the company was established but is now worth millions as a trade secret.The sale of a C corporation is also a taxable event for both the company and shareholders.Gain is calculated by subtracting the value of the property transferred from its worth at the time it was acquired.The shareholders are also taxed on the transfer, provided the assets exceed the value of the stocks traded.

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