The two terms “liquidation” and “dissolution” can easily be confused and understood to describe same actions. Nonetheless, they are not interchangeable terms. The article highlights the difference between liquidation and dissolution.
Liquidation is the process of ending a company’s existence and redistributing the assets of the company to creditors and owners
Liquidation usually occurs when there are no prospective investors to sell the company to, or there are no other merger or successors options on the horizon. In such circumstance, 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. In other words, through liquidation a company turns its assets into a liquid form (ie. cash). Proceeds from the liquidation are distributed based on the priority of claims as provided for in the U.S. Bankruptcy Code.
According to bankruptcy law, in the United States, in the event of liquidation, if there are sufficient assets to satisfy liabilities, the creditors of the company are paid first. After the creditors are paid, and if there are any excess proceeds from the liquidation, then the debt security owners receive payment. After the debt security owners are paid, and there are proceeds left, then shareholders are paid based on the stock they hold. The preferred stockholders are paid before common stockholders. 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. However, if the company’s assets cannot satisfy its debts, then the company must be liquidated according to Chapter 7 of the U.S. Bankruptcy Code. Solvent companies can also file for Chapter 7. However, there is a possibility for rehabilitating the bankrupt company and restructuring its debts.
What is the dissolution of a company?
Dissolution is the process of ending a company’s existence as a legal entity. A company can dissolve for many reasons including bankruptcy, retirement or change of investment plans. When a business stops being a legal entity, it is very important to follow the legal steps for dissolution. In other words, a corporation or a limited liability company (LLC) is an entity created under the authority granted by the state, and must, therefore, be terminated under the authority of the state. Business dissolution requires formal action.
Even if a company is dissolved, it still needs to pay all the taxes and remains liable for its assessments, fines, penalties and interest until it receives a Certificate of Dissolution from the Secretary of State. Besides the formal requests, it is important to have proper and clear provisions in the articles of incorporation dealing with dissolution. This helps the partners set in detail the process of corporate dissolution and avoid future discussions or problems.
There is a fine line between liquidation and dissolution, and the difference between liquidation and dissolution mainly consists of:
- Liquidation can be an involuntary process, whereas dissolution is mainly a voluntary process;
- Dissolution is not the last act in the life of a company, while liquidation is the last resort strategy in a company’s life;
- Upon dissolving a company, the shareholders or owners do not receive any proceeds, while upon liquidation, the shareholders or owners receive proceeds only after creditors are paid and there are excess proceeds;
- Both liquidation and dissolution represent a mechanism of ending a company’s existence.
We successfully plan and prepare liquidation or dissolution plans and can help you understand the difference between liquidation and dissolution. Contact us or schedule a consultation with your business attorney in Miami, Florida USA to help you plan and execute a liquidation or a dissolution plan.
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