Difference Between Dissolution & Winding Up

Corporate entities take many forms; the most common forms are limited liability companies (LLCs), partnerships and corporations. When a corporation, LLC or partnership closes, the process of closing is called "dissolution." The process of wrapping up loose ends during a dissolution is called "winding up" or "winding down."

The shareholders of a corporation or members of a limited liability company may decide to dissolve or be forced into dissolution for various reasons. Dissolution, or the dissolving of a corporation or LLC so that it no longer exists as a legal business or entity, is accomplished by filing the appropriate legal documents. The dissolved corporation or LLC may no longer transact new business in the state, but under voluntary dissolution it would be allowed a winding-up period by state law, in which it may dispose of its remaining non-liquid assets. These non-liquid assets often include real estate or business equipment.

A corporation or LLC may be dissolved by the filing of articles of dissolution or certificate of dissolution in the governmental office where the entity was created. State laws may vary as to exactly what documents are required. If the entity is a corporation, the state may require the authorized officer or officers to file a notice of intent to dissolve reflecting the approval of all of the required percentage of shareholders or members to the dissolution.

State law may further require that all creditors be given notice of the dissolution. The president, manager or other authorized agent should maintain complete records of the dissolution and will be required to address tax issues with the corporation’s or LLC’s accountant.

Read More: What Does an Automatic Dissolution of an LLC Mean?

There may be instances where the rights of a corporation or LLC to transact business in a state are suspended. The state may bring an action to dissolve if the corporation or LLC fails to comply with state standards, was fraudulently organized, or has abused its powers. A member may decide to file a court action to dissolve if she feels unfairly treated.

Generally, any member of an LLC may bring an action for involuntary dissolution, whereas dissolving a corporation may require a specified majority of shareholders. If the state involuntarily dissolves an entity, then it may not allow voluntary distribution of the assets or winding up by the officers or members, particularly if there are creditors involved. The courts may determine how remaining assets are distributed.

It may not be possible to liquidate all real estate or other business holdings prior to dissolution. Most states allow a reasonable amount of time during which the entity may convey assets or wind up the business. In winding up, the corporation or LLC may contract for sale of its real estate holdings and other business assets; however, it may not be allowed to purchase new assets or mortgage existing ones. This winding-up period is for the sole purpose of final distribution of existing assets.

If real estate or other business assets are not sold within a reasonable period of time, the members or shareholders may decide to value and divide the remaining property among themselves. This will be accomplished by deeds or bills of sale signed by the duly authorized signatories for the corporation or LLC conveying property to each individual member or shareholder. All debts of the corporation or LLC should be paid prior to distributing the assets in this manner.