Liquidation and Dissolution are both very common methods to close a business; however, there is a misconception that they are the same process.
There are some key differences between liquidating and dissolving a company, which you should be aware of if you are considering closing your business.
What is Liquidation?
Liquidation is the formal means of closing a company when there are still assets and liabilities which need to be dealt with. These assets need to be sold and redistributed to the creditors and shareholders of the insolvent business.
Your business may face liquidation if you have cash flow issues regularly, and creditors are threatening to take action.
There are three main ways of liquidating a company, which are:
Once the business has been liquidated, an Insolvency Practitioner will then proceed to dissolve the company from the Companies House register, meaning it will cease to exist.
What is Dissolution?
Dissolution is a cost effective way to close, or strike off, a solvent business and remove it from the Companies House register. Once the process is complete, the business is no longer legally or publicly recognised and it is officially dissolved as a company.
If the business has outstanding debts to be paid, it cannot close the business through dissolution.
Why would you dissolve a company?
Companies can be dissolved if:
- It is no longer trading
- It is a subsidiary company and no longer needed anymore
- The directors are looking to retire
Does dissolution or liquidation come first?
Although dissolution and liquidation are both methods of closing a business, they are two very different processes.
Dissolution, or the process of dissolving a company, will occur after a liquidation as the business must be struck off the Companies House register. This can only happen once the assets have been sold and distributed amongst creditors and shareholders.
It is worth bearing in mind that you can dissolve a company without going through the liquidation process, as long as your business is solvent.
What are the differences between liquidation and dissolution?
Dissolving a company through the process of dissolution often takes place when a company is solvent, but is no longer trading. Liquidation however, occurs due to a company having financial difficulties and therefore being unable to keep up with their debts.
Business owners can choose to voluntarily liquidate their business, or be forced into it by creditors through the use of Winding Up Orders.
Company directors looking to dissolve their solvent business have the option to without any outside assistance by using dissolution. However, this is not the case for liquidation as it needs to be carried out by a licensed Insolvency Practitioner.
How do I know which formal insolvency process is right for my business?
Whether you are closing your business for personal reasons, or you have found yourself facing financial issues, we will provide you with expert advice and assistance.