I am a psychologist and have a small part-time private practice that is an S-Corp in CA. I'm finding that it doesn't make financial sense to keep the S-Corp status as the revenue is not great and I have to pay $800/year for CA taxes.

How do I dissolve the S-Corp and continue the business as a sole proprieter?

You seem to forget that a Corporation (whether or not it is a C or an S Corporation) provides you with personal liability protection against a possible lawsuit.

This really is one of the main goals of incorporating a sole proprietorship, and the annual cost is $800 for the CA annual filing fee. This fee really provides you with the peace of mind. Now, of course, if you think that your business does not lead you to significant potential lawsuit, and the revenue from the business is very small, a case could be made of terminating your S Corporation.

However, remember that all net income or profit from a Sole Propreitorship is subject to the 15.3% self-employment tax liability. Whereas, in an S Corporation, depending on the revenue frequency, it is possible to shelter some of the income as pass-through income and avoid the self employment tax liability. Clearly, I would consult a CPA to determine what is the appropriate reasonable Salary for your S Corporation for your circumstances and what amount should be a reasonable pass-through income.

Thus, it may cost you more to terms of the tax liability being a Sole Proprietorship than being an S Corporation entity.

I strongly recommend that you talk it through with your CPA to determine the net cost/benefit of remaining an S corporation and consider the potential costs of terminating an S corporation along with the additional S/E tax liability if you operate as a Sole Proprietorship.

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