Liquidation vs dissolution: Understanding the key differences
If your business is facing financial troubles and has become insolvent, you may be looking at the options that are available to you. It can be a challenging and confusing time to navigate. Two of the options available are liquidation and dissolution. At first, they may seem like two names for the same process, but each offers a different path.
Understanding these two processes and their differences can help you make more informed decisions about the next step for your business. In this article, we break down liquidation and dissolution and highlight the key differences between the two. Let’s start by explaining what each term means.
What is liquidation?
Liquidation is a legal process that formally closes a business. The most common types of liquidation are for companies that have become insolvent and cannot pay their debts or afford to keep running. Companies in this situation must sell their assets to part-repay their debts, as much as can be afforded.
A licensed insolvency practitioner can help manage the process and oversee the paperwork, sell the business’s assets, repay creditors, and ensure the company is closed correctly. Once complete, the business will no longer be a legal entity, and it will be removed from Companies House.
What is dissolution?
Dissolution is another process for closing down a business, but while most liquidation processes deal with insolvent companies, dissolution deals with solvent ones. This means that the business’s finances are in good order, and it can afford to continue operating. However, they have decided to close (dissolve) the company and remove it from the Companies House register.
Here are some of the reasons to dissolve a company:
- The owner wants to retire
- The company no longer trades
- The company was a subsidiary business that’s no longer needed
Liquidation vs dissolution: what are the differences?
When it comes to comparing liquidation and dissolution, the main differences include:
- A company entering into liquidation has become insolvent. On the other hand, a company being dissolved is solvent.
- Liquidation involves selling assets (if any remain) to part-repay debts. Dissolution happens when a company doesn’t have debts and, therefore, does not need to sell assets.
- While both processes are simple, dissolution is faster (being around three months) as the only final tasks are to file final accounts and a strike off notice, whereas Liquidation has a greater level of paperwork to complete which must be done by a licensed insolvency practitioner so can take longer (typically 12 months)
- The cost of liquidation tends to be higher due to legal and professional fees. At the same time, dissolution can be handled by the company directors lowering the cost.
Which is right for your business?
The process that best fits your business is ultimately down to its financial position. If a business has debts that can’t be paid and needs to sell its assets to settle its debts with creditors, then it’ll take the liquidation route. However, if a company can afford to continue operating and has no debts, dissolution might be the most appropriate route.
Need advice about liquidation or dissolution?
If you’re not sure which process is best suited to your business and situation, then please get in touch. A member of our team will be happy to discuss your requirements and advise on the course of action that can help you achieve the best possible outcome.
Categorised in: Liquidation News, Services & Solutions
