Dissolution and Winding Up a Business - Explained
What does it mean to Wind up a Business?
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What is Dissolution of a Business?
Dissolution of a business means to undertake the formal process of dissolving the legal entity. For entities that arise by default, this can be done by declaring among the owners that the entity no longer exists. With entities filed with the state secretary of state's office (SoS), dissolution requires filing a document with the SoS declaring the business the business is dissolved.
What is Winding Up a Business?
Winding up takes place when an organization or a company dissolves. At the time of winding up, a firm fails to perform its operations like before. Its main objective is to make payments to its creditors, sell off stock to stockholders, and allocate the remaining assets to shareholders or business partners. This term is basically used in Great Britain, and is similar to the concept of liquidation. However, winding up and bankruptcy are not the same terms. When the company goes bankrupt, it is the final task to wind it up.
How Does Winding Up a Business Work?
Winding up a firm involves a legal process that the organizational laws and policies, and articles of association of the company implement. A company may choose winding up either as a necessity or on a voluntary basis. Any company, be it public or private, can prefer winding up its operations. Usually, it is the creditors of the company filing the court case against the company. Most of the times, the firms creditors will be the first one to know about the insolvency of the company. It is so because the company fails to make due bill payments. Winding up is considered to be the ultimate step of a company's bankruptcy. The firm wont have an adequate amount of assets to completely satiate its debtors, and on the other hand, its creditors will experience economic losses.
Voluntary Winding Up
The shareholders or partners of a company can voluntarily wind up its operations based on the implementation of a resolution. If the firm has become insolvent, the shareholders may go for winding it up in order to save it from bankruptcy. Also, winding up can take place for avoiding personal liability for the debts of the firm. However, it is not necessary for a firm to be insolvent for winding up its operations. In case, the shareholders of a company realize that they have accomplished their goals, they will discontinue the operations, and will allocate company assets irrespective of the company being solvent. There can be situations when market conditions can create a vague picture for the business. Shareholders who feel that the firm may experience very difficult challenges ahead, may pass a resolution for the winding up the business. Also, a subsidiary that fails to contribute effectively to the objectives of the parent company, can be wound up.
Examples of Winding Up
A few examples of famous U.S. based firms that got wound up are RadioShack, Borders Group, Circuit City, etc. The latest case of winding up will be that of Payless that started ceasing its remaining showrooms in February 2019. These retailers were already in huge monetary pressure before they filed for bankruptcy, and even gave their consent to liquidate. No firm can conduct its business operations like before after the winding up process commences. However, the firm can ensure the completion of liquidation process, and proper allocation of assets. After the liquidation and allocation, the company will be wound up and will cease to operate.
Winding up vs Bankruptcy
The terms Winding up and bankruptcy are different in nature. Once the company becomes bankrupt, the final stage will be to wind it up. For instance, the famous shoe retailer, Payless, became bankrupt in Apr 2017. As the court supervised the case, this retailer had to close around 700 stores and make repayment of debts of around $435 million. After four months, Payless got permission from the court to revive from being bankrupt. The firm kept operating till Mar 2019, and then, it had to immediately discontinue its 2,500 stores, and became bankrupt again. And now, Payless will be winding up. Key points:
- A firm that is winding up its operations wont be able to carry its business like before.
- The main goal is to make payment to creditors from the money realized from selling off assets, and allocate the remaining assets among shareholders and partners.
- Winding up is the final stage involved in bankruptcy.
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