Difference Between Liquidation & Winding Up

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About one in 12 companies closes its doors each year, according to the United States Small Business Administration. Some business owners simply don't make enough sales to survive in the market, while others retire or sell the company. No matter the reason, there are several ways to close a business. Before taking this step, make sure you understand the difference between liquidation and winding up and what each involves.

TL;DR (Too Long; Didn't Read)

Winding up is the process of dissolving a company. Liquidation is the part of that process that involves selling the company's assets.

What Is Winding Up?

The terms "liquidation" and "winding up" are often used interchangeably, but they mean different things. When a company decides to close its doors, it goes through a complex legal process that involves several steps. These involve filing annual tax returns, paying its employees, issuing payment information to subcontractors, reporting capital gains or losses and so on.

The process of dissolving a company is called "winding up." At this stage, you must terminate the company's obligations and end all business affairs. Liquidation is part of the process.

There are several modes of winding up a company, and each involves different steps. Compulsory winding up occurs when a company has been served a petition triggered by a suit brought by creditors. In this case, the firm is forced to go out of business, and a liquidator is appointed to sell its assets and pay off debt. Voluntary winding up occurs when a company’s partners or stockholders decide to end the business.

How Does Liquidation Work?

The liquidation and winding up of a company are two stages of the process of closing a company. The former involves selling its inventory and other assets in order to pay creditors and shareholders.

Payments are issued under the supervision of a liquidator appointed by the court, creditors or stockholders. In some states, this person is known as a trustee. His power is defined by the local laws. Once the debt is paid off, any remaining net assets and surplus funds are distributed among the company's stockholders based on their number of shares in the organization.

Liquidators pay the claims based on their priority. Creditors with collateral on loans to the company, for example, have priority over employees' wages and benefits. Businesses are also required to pay liquidation fees, administrative fees, money owed to employees for leave and more.

Difference Between Liquidation and Dissolution

As a business owner, you can't simply put a lock on your doors to end a company's activities. You are legally required to follow a number of steps, including liquidation and dissolution. Now that you understand the difference between liquidation and winding up, you may wonder what "dissolution" means.

In general, business owners choose to dissolve a company when it's no longer active or when they decide to retire or start a new venture. This process involves ending a company as a legal entity. Most times, it's voluntarily done when a business owner decides to cease operations. However, if an organization fails to pay taxes, it may be dissolved involuntarily by the secretary of state. The dissolution process may or may not involve the liquidation of assets.

Compared to the liquidation and winding up of a company, this process is less formal. You must pay all legal, federal and state taxes, satisfy the creditors' claims and take the steps needed to remove the company's name from registrar records. The dissolution process, though, depends on the type and size of your business, among other factors. Dissolving a small business is different than dissolving a corporation or a multinational organization. In both cases, it's necessary to notify the IRS, close any business accounts, make final payments to your employees and ensure that everything you owe is paid off.