Voluntary Liquidation

Key Takeaways

• Voluntary liquidation is a self-imposed decision to wind up and dissolve a company.
• It involves selling assets and settling financial obligations before closing the business.
• The process requires approval from a specified percentage of shareholders.
• As opposed to forced liquidation, voluntary liquidation is not court-mandated.
• In the U.S. and U.K., the process differs slightly but involves similar shareholder approval.

What Is Voluntary Liquidation?

A voluntary liquidation is a self-imposed windup and dissolution of a company that shareholders have approved. It is initiated by a company's leadership and involves dismantling the corporate structure, selling assets, and settling debts with creditors. Shareholders must approve the decision to liquidate voluntarily, and this process is not mandated by a court or regulatory body. Voluntary liquidation varies between the U.S. and the U.K., but generally requires shareholder approval in both countries.1

How the Voluntary Liquidation Process Works

A voluntary liquidation resolution must be initiated by a company’s board of directors or ownership. The process begins after a resolution to cease operations is approved by the company’s shareholders. The shareholder vote is commonly followed by the appointment of a liquidator who will liquidate assets to free up funds to pay debts, file current tax returns, and distribute excess funds to shareholders.1

The reasons for a voluntary liquidation are numerous. It may happen due to unfavorable business conditions, such as operating at a loss, changes in market conditions, or business strategy considerations. Ownership may want to exact a degree of tax relief for shutting down or decide to reorganize and transfer assets to another company in exchange for an ownership or equity stake in the acquiring company.

Important

Voluntary liquidation is contrary to forced liquidation, which involves the involuntary sale of assets or securities to create liquidity due to an unforeseen or uncontrollable situation.2

Voluntary Liquidation: Procedures in the U.S. and U.K.

In the United States, a voluntary liquidation may begin with an event as specified by a company’s board of directors. In such cases, a liquidator who answers to shareholders and creditors is appointed. If the company is solvent, the shareholders may supervise the voluntary liquidation.3

If the company is not solvent, creditors and shareholders may control the liquidation process by getting a court order. Unless the U.S. Comptroller of the Currency waives this requirement, stockholders owning two-thirds of the company’s shares must vote in favor of the voluntary liquidation.4

Voluntary liquidations in the United Kingdom are divided into two categories. One is the creditors’ voluntary liquidation, which occurs under a state of corporate insolvency. The other is the members’ voluntary liquidation, which only requires a corporate declaration of bankruptcy.

Under the second category, the firm is solvent but needs to liquidate its assets to meet its upcoming obligations. Stockholders owning three-quarters of a company’s shares must vote in favor of a voluntary liquidation resolution for the motion to pass.5

What Are the Tax Procedures During Voluntary Liquidation?

Corporations that choose voluntary liquidation must file IRS Form 966, Corporate Dissolution or Liquidation to dissolve the corporation or liquidate any of its stock. Additionally, corporations may need to file IRS Form 4797, Sales of Business Property if they sell or exchange property used in their business, and Form 8594, Asset Acquisition Statement, if they sell their business.6

Who Institutes a Voluntary Liquidation?

The company’s ownership or board of directors must initiate the process, but generally, the decision must be approved by a vote of those holding either two-thirds of the company’s shares (U.S.) or three-fourths of them (U.K.).53

What Is an Exit Strategy?

A business exit strategy is a strategic plan for a business owner or corporation to sell ownership in a company to investors or another company. An exit strategy gives a business owner a way to liquidate their stake in a business and limit losses.