Why do we liquidate companies? We liquidate companies so they can be closed down in a fair and organised way that minimises the risk of disputes arising.
So long as a company exists it has a range of obligations to comply with legislation such as to file accounts and tax returns. If a company is liquidated then such requirements will cease.
There are differences that arise when a company is solvent or insolvent.
Why Do We Liquidate Insolvent Companies?
If a company is insolvent and unable to continue trading it needs to be liquidated. The most common procedure would be Creditors Voluntary Liquidation.
If the company was not liquidated but ceased trading then sorting out the company’s affairs would be disorganised and chaotic. The assets can be sold and turned into cash. The claims of creditors can be decided upon so that it can be determined who is entitled to what proportion of the assets.
Liquidating the company is a way of preventing such a process from turning into a mess from disputes that otherwise might arise. The liquidation process means multiple parties having differing rights and interests can be looked after.
Why Liquidate Solvent Companies?
If a company is solvent and owner managed then in order to conclude its affairs a liquidation may enable an efficient winding up whereby the shareholders are able to extract their money tied up in the business and its assets.
Although for a solvent company, there is no requirement for it to be liquidated there are tax advantages from going into the procedure known as Members Voluntary Liquidation. This can benefit potentially from not only favourable tax rates arising from the distributions to shareholders as capital instead of income but also they may also be able to obtain business asset disposal relief.
Business assets disposal relief (formerly known as Entrepreneurs Relief) can reduce the tax rates on capital down to 10% for up to £1,000,000 of distributions per shareholder. That could mean a tax saving for distributions other than residential property of £100,000 per shareholder.
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Disclaimer: Why Do We Liquidate Companies?
This page is not legal advice and is not to be relied upon as such. This article Why Do We Liquidate Companies? is provided for information purposes only. You should take independent advice on the facts of your case. No liability is accepted for reliance upon this post.
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