Liquidation and Dissolution

Liquidation and Dissolution

Advanced Federal Taxation

The process of dissolving or liquidating a corporation is just as complicated as the formation of a corporation. The formation of a corporation includes gathering shareholders, the exchange of money and property, and most importantly, setting up the statement of incorporation. When liquidating or dissolving a corporation, these actions are reversed. Both involve entities outside the business itself, such as the processes of notifying the IRS of the liquidation, paying suppliers and vendors, and stock return from shareholders of the corporation. While dissolving a corporation certainly has its own rules, regulations and requirements, in order to understand the processes necessary in liquidation, it is important to have an understanding of formation.

In order to form a corporation, money, property or both are transferred into the corporation in order to gain stocks. There are three requirement that must be meet in order for a corporate formation, “ The taxpayer must transfer property or money to the corporation, the transfer must be solely in exchange for stock of the corporation, and the shareholder (s) qualifying for nonrecognition must own at least 80 percent of the corporation’s stock after transfer.” Whittenburg, G. E, Altus-Buller, M., (2008). As the corporation becomes successful, the shareholders earn dividends throughout the year and the corporation grows. As the shareholders earn more money, there is also increased value in property and the size of the organization.

However, not all corporations are successful and can sometimes fail to maintain the going concern. When corporations lose the going concern whether due to loss of business demand or inability to maintain market share or the shareholders decide to quit the corporation, the result can be liquidation. Thus, corporations that do not become self-sustaining end up having to liquidate or dissolve the corporation all together.

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