Differences between liquidated corporations dissolved corporations
Although many people do not recognize the difference between corporate liquidation and dissolution, the truth of the matter is that there is a fine line between the definitions of the two. The difference between the two emanates from their definitions in relation to tax. Under business law, liquidation is a process through which a company (or a fraction of the company) stops its normal operations and assets transferred to shareholders. Consequently, shareholders will then share all assets and properties belonging to the company according to number of individual shares.
Very many factors may force the company or a fraction of a company to undergo liquidation. Chief among these factors is when the country’s body charged with collecting and safeguarding custom duties resolves the final computation and discovers massive hitches in the company’s entry. The body will then force the company to undergo liquidation to prevent it from collapsing. There are two types of liquidation: creditor’s liquidation (or compulsory liquidation) and shareholder’s liquidation (sometimes called voluntary liquidation). Each of this occurs on dissimilar grounds (Guardino, 1990, p. 1-2).
On the other hand, corporate dissolution is the final stage of terminating a corporation. Just like liquidation, dissolution is either compulsory or voluntary. For instance, the corporation might agree to dissolve voluntarily through a resolution, where they will redistribute assets, reimburse any existing debts, and finally send the dissolution credentials to the Secretary of State. On the other hand, dissolution can be compulsory following a state suspension imposed when the corporation fails to pay its taxes or when the state exercises its jurisdiction to control certain factors.
When a company decided to halt its normal business operations, it automatically undergoes a flurry of legal processes. The legal process in corporate liquidation is much more stringent as compared to corporate dissolution. According to tax code 334 (IRC 334), the corporate will redistribute assets under liquidation to the shareholders or owners, of course, by meeting statutory requirements. Under liquidation, the corporation targets cash from the sale of its assets and inventory. The corporation will use the cash realized from these sales to payout debts and other commitments as required by the law or court (Guardino, 1990, p.3-4).
On the other hand, corporate dissolution is the process of closing a legal entity, that is, to shut down a business legitimately. According to tax code IRC 346, the corporation that intends to dissolve will then apply for federal or state tax refunds emanating from business activities. The provision also mandates the corporation to use assets including tax refunds to pay creditors who supplied stock. The corporation will also use the amount realized from the sale of the assets and properties outside Trust Fund to pay service providers for example, lawyers, advisors, accountants, and even vendors. For instance, a corporation owned by several shareholders and operating from a rented premise, which houses furniture, computers and stationeries, may decide to sell these assets and dissolve. The shareholders will then share the revenue generated from the sale of assets according to their shares, while tax refunds will settle (Wikinvest, 2009, p. 1).
Dealing with assets in corporate liquidation and dissolution
The IRC 334 gives a way forward on the state of properties and assets received in liquidations. Primarily, there are two levels of corporate liquidations: corporate level and shareholder level. At the shareholder level, the corporation will have to dispose the remaining stock for assets. Usually, there is capital gain. On the other hand, the corporate level treats the realized gain or loss as the gap between the adjusted basis of assets and the fair market value. In other words, under corporate liquidation, the corporation has the audacity to transfer all the remaining assets to the hands of shareholders. It does not matter whether the assets are in form of property or cash. After transferring the assets to the shareholders, the shareholders definitely presume the residual liabilities. Consequently, the manner of tax treatment will change according to tax code’s Section 331(a). This section states that the corporation shall treat all assets under liquidation as full payment realized in any exchange of goods for cash. Depending on the manner of distribution, the stockholders will either gain or loose capital. For instance, if the net distribution of assets is higher as compared to the shareholder’s adjusted basis, then, they will realize capital gain. On the contrary, if the net distribution is less as compared to the adjusted stock, then, shareholders will realize a capital loss. However, losses arising from liquidation is not evident until the corporation disposes its final stock, or until the corporation has made its final sizeable distribution. Under Section 336(a) of the tax code of the United States, a capital gain or loss is only recognizable by a company undergoing liquidation once it distributes its properties and assets—just like in the case where buyers buy properties at a fair market value. In other words, when a corporation undergoes liquidation, two risks arise: the corporate and the entity responsible for distributing shareholder levels will meet new tax measures according to tax code 338(h)10 (Hamill, 1992, pp.1-10).
Although the tax code does not recognize dissolution, IRC Section 332 proposes that a corporation can wind up its business activities by paying debts, and redistributing the remaining assets to the rightful shareholders. It is imperative to note that corporate dissolution does not attract a legal company closure. However, according to the law, if the corporation halts its business operations, and does not have any income or assets, and the corporation has met the debts and shared its assets among shareholders, consequently, it can dissolve. Importantly, if the dissolution process fails to transfer properties and assets to the shareholders, then, albeit dissolved, the corporation still exists. Otherwise, the corporation can exist even though by law, it stands dissolved. Thus, only when the process allows the transfer of assets to the rightful owners or shareholders is the corporation fully dissolves and cannot exist anymore.
Shareholders in Corporate Liquidation and Dissolution
As we have seen from above, shareholders have a say in the two processes. However, the treatment of shareholders in each both corporate liquidation and dissolution differs great. For instance, in corporate liquidation, some shareholders at the time of liquidation will be having more shares as compared to other shareholders. If a shareholder owns more than a single block of stock in a corporation, then the operation somewhat changes. It is also paramount to remember that such a shareholder take delivery of a chain of distributions, and hence, the need to treat the shareholder differently. What happens here is that the corporation will divide and distribute assets based on blocks. Undoubtedly, the blocks carry the same quantity of shares and amounts to the total number of shares owned by individual shareholders, distributed at a given duration. The liquidation process also allows shareholders to recuperate the entire basis of a block prior to announcing any capital gain.
In corporate dissolution, shareholders enjoy maximum benefits. In other words, the basis of the shareholder remains unaffected, and the time of holding the stock is unlimited. Thus, shareholders can take the maximum time possible to distribute their goods for greater gains. Unlike corporate liquidation, corporate dissolution does not involve new tax measures, thus, shareholders will continue with their old method and tax rates (Brown, 2010, p.1).
In conclusion, corporate liquidation is not the same as corporate dissolution. Nevertheless, the law recognizes the two processes, as they involve assets, debts and transfer of assets. Perhaps, the only similarity between the two is the distribution of assets to shareholders, paying of debts and signing of documents.
Reference List
Brown, A. (2010). Section 7. Corporate Liquidations/Dissolutions. Web.
Guardino, R. (1990). Section 331 liquidations. Web.
Hamill, J. (1992). Liquidating a corporation: how to structure a plan of liquidation to avoid unanticipated tax liabilities. Web.
Wikinvest. (2009).The Dissolution and Plan of Liquidation Proposal. Web.