When a company goes out of business, there is a set of legal processes by which the company will typically go through, including the liquidation of assets and the distribution of the proceeds to creditors and owners. This entire process is known as dissolution. Therefore, the major difference between liquidation and dissolution is that liquidation is a part of the overall dissolution process.
Dissolution is a legal concept that refers to the formal death of the company. Once a company completes the dissolution process, it is no longer a formal legal entity. A company can be dissolved voluntarily by its owners or involuntarily by the secretary of state in the state in which it is registered for failure to pay taxes. Additionally, creditors can petition a court to force a company into dissolution.
When a company goes out of business, it must first wind up its business activities. Few businesses can simply close their doors the instant they decide to go out of business. Instead, they may have to manage long-term commitments with the owners of property they are leasing, employee payroll, long-term contracts and sales commitments.
Once the activities of the company are wound up, it can begin to liquidate its assets. The assets that typically require liquidation are inventory, raw materials, equipment, plants and buildings. To get the full value of all of its assets, a company may need to spend a great deal of time searching for the right buyers. Because the reason for going out of business is often an inability to cover costs in the first place, companies may choose not to spend the time and resources required to get the full value of their assets and will end up liquidating them at a significant discount.
Liquidation Without Dissolution
The liquidation of a company does not require a formal dissolution. A company can go through the entire process of ceasing business operations, selling its assets and paying off creditors while not formally dissolving. A business may do this if it wants to keep the legal identity of a business for use in another venture. For example, 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.