In the United States, there is a fine line between the concept of dissolution and liquidation of a business
While dissolution and liquidation are related steps in closing a company, they describe different actions. The dissolution of a company is governed by the business and corporate laws of each state and the company’s organizational documents such as articles of incorporation, operating agreement and bylaws. The business and corporate laws vary from state to state and as a result, the dissolution of a company is administered differently in different states.
Dissolution is the process of ending a company’s existence as a legal entity. The process is carried out by filing documents to dissolve the company as a business entity. However, dissolution is not the last act in the life of any partnership, limited partnership, limited liability company or corporation. The business entities survive past the dissolution in order to wind up the affairs, pay off creditors and distribute what is left to the owners. In other words, a company’s dissolution commences the winding up of the company’s affairs and leads to the company’s ultimate termination.
In Florida, a corporation, limited liability company or limited partnership are entities created under the authority of the State of Florida. Accordingly, when any of these entities dissolve, their existence may only be terminated by the State of Florida. However, the company remains liable for all taxes, assessments, fines, penalties and interests until it receives an official certificate of dissolution from the Secretary of the State of Florida. In Florida and in most states, legal entities must be dissolved through formal action and by sending the required filings to responsible agency. If the company is not legally dissolved, it remains obligated to file reports and pay taxes.
Similarly, the liquidation of a company is governed by the business and corporate laws of each state and the company’s organizational documents
Liquidation is a last legal resort for a stressed company, and it occurs when there are no prospective investors to sell the company to, or there are no other merger or successors options on the horizon. The liquidation process involves selling the assets of the company or converting them into cash or cash equivalents, which are then distributed to creditors and any shareholders or company members.
Proceeds from the liquidation are distributed based on the priority of claims as provided for in the U.S. Bankruptcy Code. Based on the availability of funds, the sale proceeds are distributed in the following order: creditors, debt security owners, preferred shareholders and lastly common shareholders. The sales during liquidation of a company take place in different forms such as negotiated buyouts, auctions or consignment sales.
Liquidation can be voluntary or involuntary. In some cases, a business owner may decide to close his or her business and liquidate the company. In other cases, business owners may be forced into liquidation by a creditor in order to pay off a loan.
Dissolution and liquidation are complex processes and generally require a company to engage highly qualified professionals. We recommend business owners to speak to an experienced attorney and accountant before starting to dissolve and liquidate assets.
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