The meaning of company dissolution attributes to a process of formally and officially closing the company. The terms 'formally' and 'officially' imply that company will no longer exist in public registers. There are multiple ways to close a company and each way has slightly different process, but generally, dissolution is the natural result of any of these procedures. Two most common ways to dissolve a company are by liquidation or by bankruptcy.
- Liquidation of a company
- Liquidation is a voluntary choice and it means that shareholders vote to close the company (or if there is only one owner, he decides to do so). After completion of all formalities and submission of all applications, liquidation process can begin. Further process will vary depending on legal form of the company and jurisdiction. For example, some less complex legal forms usually can be dissolved in a few days, while in order to dissolve other legal types, the whole process may take up to three months or even longer. Everything is based on the amount of assets, number of creditors and overall case complexity level.
- Filing bankruptcy
- Bankruptcy process is usually enforced: it is requested by creditors, third parties or by the owners of the company, if during the liquidation or insolvency process a company cannot settle its liabilities. Bankruptcy process takes longer time period than liquidation and in most jurisdictions decision of court is necessary to initiate the process.
It is essential to dissolve the company officially, as there are many drawbacks by not doing so and leaving the company idle. Firstly, you cannot claim the property of the company. As long as the company remains in public register, it is recognized as a legal entity. Secondly, there can be legal consequences for not dissolving a company. For example, in some countries by not dissolving the company, you will still be required to pay corporate taxes in a fixed amount annually, even if the company is dormant and does not perform any commercial activity. There may be other regular obligations to be followed, e.g., annual reports, bookkeeping, auditing, etc.
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Reasons for company dissolution
There can be many different reasons to dissolve a company. One of the reasons could be that the company is no longer having profit and shareholders do not see a way how to bring the company back to the market, thus they decide to liquidate the company.
Another reason could be that the owner wants to re-structure a company to an absolutely different legal or business form. For example, the business is expanding and an individual merchant form is no longer an effective option, so the owner decides to reorganize the form to an LLC. Alternatively, the company has too many debts and in order to avoid it partially, the bankruptcy procedure must be initiated. After the process is over, a new company can be incorporated again.
Person performing the dissolution
In most of dissolution procedures, the process will be exercised by a liquidator - a special person appointed to dissolve a company. Usually, liquidator can be one of the directors or another appointed person, who is chosen by shareholders. Company decides who will dissolve the company at a shareholder meeting and includes it in an official resolution. The resolution along with other documents required, must be submitted to local commercial register. In case of insolvency proceedings, the insolvency administrator is usually appointed by the court.
Company dissolution guide
The most common dissolution can be named LLC liquidation. In general, this process can be described in four steps:
- Step 1: making a decision
- To dissolve a company, shareholder must make a decision regarding initiation of the liquidation process. If there are two or more shareholders, a vote for such decision shall be necessary. In addition, making this decision, shareholders must appoint a liquidator.
- Step 2: filing documents
- When the decision is adopted, certain legal documents must be filled and submitted to a local commercial register or other state authority responsible for such applications. Usually, it is required to submit a filled blank, resolution about liquidation, consent of liquidator to be appointed and the receipt on payment of the state fees.
- Step 3: settling debts with creditors
- During the liquidation process, the liquidator must settle all debts of the company, including taxes. These can either be unpaid loans, unfinished contracts or undelivered goods, etc. During this step, the property of the company will be sold. If it is necessary to gain funds, which will be used to cover the liabilities, it is required to settle tax payments with tax authorities as well. The remaining resources are distributed between shareholders proportionally to number of shares accordingly.
- Step 4: finalizing the dissolution
- When all previous steps are done, you can finally dissolve the company. It can be done by submitting final papers to the local commercial register. When it is done, the company will be removed from the public registers, which means it will no longer exist.
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Company dissolution in general does not differ very much around the globe. In general, two dissolution procedures are available – voluntary one (liquidation) and forced one (bankruptcy). However, some of the countries have created special dissolution options.
For example, in Denmark you can make a payment declaration, by which shareholders confirm that all creditors are aware of company dissolution and that all debts are paid. In, Netherlands Cyprus and Portugal, you can have an expedite liquidation, which can be used when company does not have any assets or liabilities. The company is either dissolved at the very moment when the resolution of shareholders are accepted or if the liquidation process is significantly simplified.
Liquidation reliefs for some legal forms can be found in Latvia. For example, if an LLC has no known creditors or liabilities, the liquidation process can be finished in hardly more than a month. The state tax for liquidation is low as well.
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