Running a corporation or company can be a very difficult thing. Some people set out to start a company and their goods or their services are desired enough that the business expands and employs many people. Unfortunately, just because a company has grown, that does not mean that the business is now or ever impervious to economic downturn or a change in consumer attitude. More than half of all businesses will fail and the company that was created with the highest expectations or even the best of intentions will have to be destroyed eventually. When this happens, and it does far too often, the components of the business will have to be dealt with, usually by liquidation of assets or by dissolving the company. Legally, in order to have a business disintegrated, certain processes must be undertaken and procedures followed. Liquidation and dissolution are two ways in which a company can be disbanded. Often these terms are used interchangeably but that is incorrect and inappropriate. True, both terms refer to the disseverment of a business, but that is where they stop being similar. There is actually a great difference between these two concepts, particularly evident in the ways that assets are dealt with and share holders are treated.
In simplest terms, liquidation is the act of getting rid of inventory. When a company needs money, they will sell off excess inventory, even to the point where they sell off the entire inventory that they possess. This is often a last attempt to save a failing company. Assets can be liquidated without the company being dissolved. Dissolution, on the other hand, is the complete dissolving of a company and its assets. When this happens, there is no chance for the company to continue practicing business. Once a business is dissolved, the business folds and the employees are out of a job. Sometimes, a business will liquidate its assets but retain itself as an entity to be used in other ventures or in the hopes of rebuilding the business in the future. One example, according to Richards (2011) is when "the business may have a name with strong brand recognition that it wants to preserve or may simply want to reuse the current legal structure between the owners for a new venture." Liquidation is a process of a whole dissolution. It is the first step of the other, which is the complete process.
There are two ways a company can be dissolved. Either the executives of a company can decide for themselves that they want to dissolve the company (called a voluntary dissolution), or a business can be dissolved by the government, most often for failure to pay taxes. Also, should a company owe substantial moneys to another party such as through a loan, then the group that is owed money can petition the courts to force the company to dissolve (Richards 2011). When dissolving a company, the business must conduct several activities to ensure that stockholders and employees are treated fairly, including the aforementioned liquidation of assets. Anything that the company owns or produces can be considered an asset available for potential liquidation. These can include: inventory, raw materials, equipment, plants, and even the buildings that house the company offices (Richards 2011).
When a corporation is liquidated, the stockholders are dealt with financially, but only after those to whom the company is indebted have been paid. According to Dennis Campbell (2009):
The liquidation will not release the shareholders or prevent the opening of the company's bankruptcy procedure. The liquidation of a company's assets involves the conversion of the company's assets into cash, and the cashing in of receivables that that company holds against third parties. Payment of the company's debts toward its creditors is performed from the amounts obtained from liquidating the company's assets. For the purpose of settling debts, the liquidators may issue bills of exchange, enter into loan agreements, or may pay debts out of their own resources (page 349).
The people who have invested in the company in the past and continue to do so when the business is approaching failure are first to be paid off from the moneys accrued during liquidation (Gworek 2007). This is called distribution of liquidation funds. The shareholders are paid, usually at a loss given that the business is not successful. There are two types of stockholders in most companies: preferred and common. If the company is only in a liquidation phase, then the preferred stockholders have the option of being paid out directly following liquidation or to "ride two horses" and await the results of that liquidation. If the business continues to flounder and becomes dissolved, the preferred stockholder will then only receive the same amount of money as the common stockholder.
Before the year 2007, officially dissolution and liquidation were used interchangeably even by corporate executives familiar with proper lingo for that dialogue group. In that year, the Internal Revenue Service (IRS) issued a new code which would differentiate the two terms when it came to taxation on property (Willens 2008). The reason that the code was written was to deal partially with the taxation of the shareholders and to reduce confusion or excuses of confusion where it came to paying taxes on defunct businesses. According to the IRS, dissolution is the complete disseverment of a company. "Unless dissolution brings about an automatic transfer of the corporation's assets to its shareholders, the corporation, even though dissolved, continues its existence. Accordingly, the continuation of existence, after dissolution, may well depend on whether the governing state law provides that a dissolved corporation can still own assets" (Willens 2008). Liquidation, on the other hand, is the selling of all assets of a company with the intent of acquiring financial assistance. A company can be completely liquidated with dissolving the corporation. Also, assets can be turned over to the government and treated as payment for taxes that are due. Therefore, according to the government, liquidation is only one step towards the dissolution of a company. Even if a company has had to liquidate assets, the company many still continue to survive. The same is not true for a company facing dissolution. Once a business has been dissolved, it no longer exists.
Campbell, Dennis (2009). International Joint Ventures. 2008. Kluwer Law.
Gworek, Jonathan D. (2007). "The Liquidation Preference of Non-participating Preferred."
Morse Barnes-Brown Pendleton.
Richards, Leigh (2011). "Differences in a Liquidation and a Dissolution."
Willens, Robert (2008). "What's the Difference? Liquidation vs. Dissolution." CFO.