When it comes to dissolution vs liquidation there can understandably be a degree of confusion. After all, both terms indicate the closing down of a company, however there is a key distinction between the two terms which means they shouldn’t be used to mean the same thing.
To help you understand the difference between dissolution vs liquidation, and what each process entails, Clarke Bell has put together this handy guide.
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Let’s first look at dissolution. This is a process that legally marks the end of a company.
Dissolution is often a voluntary process initiated by the company director. The director needs to complete a DS01 form which costs just £10 and is paid to Companies House.
Once this is completed and returned, the company will be closed and struck off the Companies House Registrar.
However, dissolution can also be forced on a company for reasons of ‘non-compliance.’ This might occur because the company doesn’t have a director in place, has failed to file annual returns or annual accounts.
Why choose dissolution?
There are many reasons that a company director might choose to dissolve their business.
It might simply be the case that they are looking to retire, or perhaps the business has fulfilled its purpose and there is no need for it to stay open. In this case, dissolving the company is an easy way to close it down.
Can any company be dissolved?
Any company can be dissolved so long as it meets the following criteria:
- It hasn’t changed its name for the last 3 months
- It hasn’t traded or sold off any stock for the last 3 months
- It hasn’t been threatened with liquidation and doesn’t have any other agreements in place with creditors like a Company Voluntary Arrangement (CVA)
That’s what dissolution is, and who is eligible to dissolve their business, so now let’s look at liquidation.
Although like dissolution, liquidation is also a process that brings a company to an end, it is a different process and can only be entered into by a company which still has assets and liabilities that need to be dealt with.
The liquidation procedure breaks own the company’s assets and liabilities, redistributing them amongst shareholders and creditors.
Liquidation is a formal insolvency procedure and for this reason, a licensed Insolvency Practitioner must be appointed to carry out and oversee the process.
There are several forms of liquidation, these include:
Creditors’ Voluntary Liquidation (CVL)
As the name suggests, this is a completely voluntary form of liquidation and is an option open to insolvent companies that can no longer pay their bills, debts or cover daily costs.
In other words, this is an option open to companies that are no longer sustainable and do not have a viable future, meaning voluntarily closing is the best option in order to avoid being forced into compulsory liquidation.
To enter into a CVL, 75% of the company’s shareholders must agree.
Then, an Insolvency Practitioner will be appointed to organise the company’s affairs and carry out the liquidation process.
The outcome of a Creditors’ Voluntary Liquidation is to get the best possible outcome for creditors.
Members’ Voluntary Liquidation (MVL)
Members’ Voluntary Liquidation is another form of voluntary liquidation initiated by the company directors and shareholders. However, unlike with Creditors’ Voluntary Liquidation, this is an option open only to solvent companies who are sustainable and have assets greater than £25,000.
There are many reasons a company director might enter into an MVL, including:
- They are looking to retire
- They wish to take a step back within the company into a PAYE role
- They are moving abroad
- The company has fulfilled its purpose and there is no longer a need for it
There are many benefits to closing a company through Members’ Voluntary Liquidation, including:
- It is a quick and easy way to close a company and free up funds
- It is an HMRC approved tax-efficient way to close a business
This is because any money taken out a business through a Members’ Voluntary Liquidation is subject to Capital Gains Tax rather than income tax, making it a far more tax-efficient route.
This is due to the fact that you will be charged just 10% in Capital Gains Tax on profits over the lifetime of your business, rather than 18% at the basic level of income tax or 28% at the higher level.
There are also further benefits for those who are eligible for Business Asset Disposal Relief, previously known as Entrepreneur’s Relief until 6th April 2020, which can save the director a small fortune on their tax bill.
This is what makes MVL such a popular route for many solvent companies.
The final form of liquidation is compulsory liquidation. As the name suggests, this is when a company is forced to close, unlike in the cases of both CVL and MVL.
Rather than being initiated by the company director, compulsory liquidation is a process started by creditors who are owed money. The creditors must be owed at least £750 and have had repayment demands ignored for at least 21 days.
Creditors will issue a winding-up petition to the court which, if successful, will then appoint an Insolvency Practitioner to forcibly close and wind-up the company.
Although voluntary liquidation and compulsory liquidation end with the same outcome, they are brought around in very different ways.
Compulsory liquidation is the most serious form of liquidation and can have serious, negative consequences for the company director.
Now you know the difference between dissolution vs liquidation, let Clarke Bell help
Although dissolution and liquidation end in the same outcome, with the closing of the company, they are different processes with key distinctions, meaning it’s important to do your research to find which is the best path for you.
For more help with all things dissolution and liquidation, or for some free initial insolvency advice, Clarke Bell are here to lend a hand.
If you are looking to dissolve or liquidate your company, whether through a CVL or MVL, we will work closely with your company to find the best way forward.
Our team have over 25 year’s experience to hand and offer only the best insolvency advice.