What is Dissolution and Liquidation?

Malcolm Tatum

Dissolution and liquidation is a two-fold process that takes place when a business is shut down permanently. The idea is to not only dispose of any inventory and assets owned by the company, but also to terminate the recognition and standing of the business as a legal entity. Laws regarding the processes required to achieve this goal vary somewhat from one nation to another, making it necessary to work with legal counsel to make sure each step is done in order. This includes making sure the strategies employed are in compliance with the regulations that govern the operation of businesses within jurisdiction in which the business was incorporated.

Man holding a globe
Man holding a globe

For the most part, the first component in the dissolution and liquidation process focuses on the orderly divestment of all assets of the business. The idea is to sell off the assets and settle any outstanding debts owed by the company. Disposing of the assets also makes it possible to settle obligations to shareholders, pay any taxes that are currently due for the period up to the final day of operation, and in general make sure that everyone connected with the business is compensated fairly. Depending on the scope of assets held by the business, this process may take anywhere from a few months to a few years.

In nations that require divestment of assets first, the last stage of the dissolution and liquidation process focuses on officially ending the existence of the company as a legal entity. Here, the task requires providing the necessary paperwork to governmental agencies that oversee the incorporation and official recognition of business enterprises within the area where the company was established. Proof that the entity has settled all known obligations and been divested of all assets is often required before the company is considered legally and permanently dissolved.

It is important to note that the criteria for managing a process of dissolution and liquidation may be different from one country to another, and possibly vary from one state or province to the next in some cases. For example, if the company is being dismantled as part of a court order, there is some chance that the company will be officially dissolved first and the assets transferred to a holding company. That holding company then takes on the task of liquidating the assets, with the courts disbursing the cash generated from the liquidation to creditors and other interested parties. For this reason, securing legal counsel and making sure that dissolution and liquidation laws are followed to the letter is very important, if the former owners wish to settle the business of the company fully and move on to new projects.

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