Last Updated on December 17, 2022 by Anda Malescu
The article discusses the difference between liquidation, dissolution and winding up a company in the United States. Liquidation, dissolution and winding up are different but related terms and actions. Ending a company’s existence can sometimes be a bit of an ordeal because there are multiple ways of doing it.
Liquidation is the process of ending a company’s existence and redistributing company’s assets to creditors and owners
Liquidation is also referred to as dissolution and the terms are used interchangeably, but technically they describe different actions and their meaning is not the same. In other words, liquidation is seen as a last legal resort for a stressed company, while dissolution is the first step in closing a business. 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.
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. In the case of dissolution, shareholders or owners do not receive any proceeds, whereas in case of liquidation, the shareholders or owners receive proceeds from the company if there are enough assets, after paying the debts owed to the creditors of the company.
Dissolution is the procedure that ends a company’s existence as a legal entity
In other words, the existence of the company is terminated, and the process is carried out by filing documents to dissolve the company as a business entity. Dissolution can be either voluntarily or involuntary and is not the last act in the life of any partnership, limited partnership, limited liability company or corporation. Unless exceptions apply, a company’s dissolution commences the winding up of the company’s affairs and leads to the company’s ultimate termination.
In the United States dissolution varies from state to state. In Florida and in most states, legal entities must be dissolved through formal action and by sending the required filings to the responsible agency. If the company is not legally dissolved, it remains obligated to file reports and pay taxes.
Winding up the affairs represents another step after the dissolution process starts
The winding up process is not a simple one and it involves actions such as notifying creditors of the company, closing out bank accounts, canceling business licenses, permits and assumed names, paying the creditors, paying taxes and filing final reports.
Winding up a company is a legal process governed by the business and corporate laws of each state and the company’s governing documents (articles of association, operating agreement, articles of incorporation, bylaws or operating agreement). It is a process involved in dissolving the company and before liquidation is on the horizon. While winding up, a company ceases to do business as usual. Once the winding up process starts, a company can no longer pursue business as usual. The only action a company may attempt to take is to complete the liquidation and distribution of its assets. At the end of the process, the company is dissolved and ceases to exist.
In conclusion, before a company ceases to exist, the company must wind up its affairs. “Winding up” and “liquidation” do not represent the same action. Essentially, the winding up process deals with actions ending the business affairs and terminating company obligations before liquidation. In contrast, liquidation deals with selling the company’s assets and turning them into cash and cash equivalents which are then distributed to creditors and owners pursuant to priority of claims as provided for in the U.S. Bankruptcy Code.
Contact us or schedule a consultation with your business attorney in Miami, Florida USA to help you understand the difference between liquidation, dissolution and winding up and help you plan a liquidation, dissolution or winding up plan.
Malescu Law P.A. – Business Lawyers
