What Is Voluntary Liquidation?
Let me explain voluntary liquidation directly: it's a self-imposed windup and dissolution of a company that shareholders have approved. As the leadership, you decide that the company will dissolve, and this isn't something forced by a court. In this process, you terminate operations, wrap up financial affairs, and dismantle the corporate structure while paying back creditors based on their priority.
Key Takeaways
Here's what you need to know: voluntary liquidation terminates a corporation by selling its assets and settling outstanding financial obligations. The goal is to cash out of a business without a viable future or any other reason to stay operational. Remember, this isn't mandated by a court or regulatory body.
Voluntary Liquidation Process
You start a voluntary liquidation with a resolution from the company's board of directors or ownership. The process kicks off after shareholders approve ceasing operations. Typically, you then appoint a liquidator who sells assets to free up funds, pays debts, files current tax returns, and distributes any excess to shareholders.
Reasons for this can vary—you might face unfavorable business conditions like operating at a loss, shifts in the market, or strategic changes. Sometimes, ownership seeks tax relief by shutting down, or you reorganize and transfer assets to another company for an ownership stake in the acquirer.
Important Distinction
Keep this in mind: voluntary liquidation is the opposite of forced liquidation, which forces the sale of assets or securities for liquidity due to an unforeseen or uncontrollable event.
Procedures in Other Countries
In the United States, voluntary liquidation can begin with an event specified by the board of directors, and you appoint a liquidator accountable to shareholders and creditors. If the company is solvent, shareholders supervise it. If not solvent, creditors and shareholders might control it via a court order. Unless waived by the U.S. Comptroller of the Currency, you need two-thirds of stockholders to vote in favor.
In the United Kingdom, there are two categories: creditors’ voluntary liquidation under insolvency, and members’ voluntary liquidation, which requires a declaration of solvency. For the latter, the firm is solvent but must liquidate assets for upcoming obligations. You need three-quarters of stockholders to vote for the resolution to pass.
What Are the Tax Procedures During Voluntary Liquidation?
If you're going through voluntary liquidation, corporations must file IRS Form 966 for dissolution or stock liquidation. You may also need IRS Form 4797 for sales of business property, and Form 8594 if selling the business.
Who Institutes a Voluntary Liquidation?
The company's ownership or board of directors initiates it, but you generally need approval from two-thirds of shares in the U.S. or three-fourths in the U.K.
What Is an Exit Strategy?
An exit strategy is your plan to sell ownership in a company to investors or another firm, allowing you to liquidate your stake and limit losses.
The Bottom Line
Voluntary liquidation lets a company cease business without a court order. The process differs slightly between the U.S. and U.K., but both require the board to start it and a specified percentage of shareholders to approve. Creditors might get involved depending on the situation.
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