Liquidation is a formal insolvency procedure in which a company is brought to an end; all of its assets are liquidated and the proceeds from the sale of assets is used to repay creditors.There are two main types of liquidations for insolvent companies– compulsory liquidation and creditor’s voluntary liquidation (CVL).In a compulsory liquidation the company is wound up by one of its creditors or HMRC after failing to pay a debt of more than £750.A creditors’ voluntary liquidation takes place when the directors purposefully choose to liquidate the company.
This helps ensure that the shareholder only benefits once from reductions in income earned by the S corporation.
When a company’s assets are liquidated, or converted to cash, the cash is then used to pay off creditors.
But there are different classes of creditors that determine in what order they are paid.
Liquidation generally refers to the process of selling off a company’s inventory, typically at a big discount, to generate cash.
In most cases, a liquidation sale is a precursor to a business closing.
Because the income of S corporations is taxed to the owners when the income is earned, a mechanism is needed to ensure that the shareholder is not taxed again when the earnings are distributed.