Many entrepreneurs are forced to end their businesses for various economic, social, and cultural reasons, and the vast majority are limited liability companies. Therefore, it is important to understand how the dissolution of a limited liability company occurs, and if the entrepreneur considers it the best alternative.
If you identify with this situation, this article is for you.
Perhaps the first question you might ask is…
How is a Limited Liability Company Dissolved?
The dissolution of a limited liability company consists of 3 main phases: dissolution, liquidation, and extinction. Let’s examine them one by one…
Dissolution of the Limited Liability Company. The first phase is dissolution, where the company retains its legal personality; however, it ceases to generate profits, and its main objective is solely liquidation. The main causes of the dissolution of a company are:
Dissolution by operation of law Dissolution agreed in the General Meeting Dissolution by operation of law The dissolution by operation of law occurs automatically without the need for an agreement from the general meeting of partners.
The main causes of dissolution by operation of law are regulated in Article 360 of the Capital Companies Act. Let’s review them one by one.
- Capital companies shall be dissolved by operation of law in the following cases:
- a) Upon the expiration of the term of duration set in the bylaws, unless it has been expressly extended and the extension registered in the Commercial Registry beforehand.
- b) Upon the expiration of one year from the adoption of the agreement to reduce the share capital below the legal minimum as a result of compliance with a law, if the transformation or dissolution of the company or the increase of the share capital to an amount equal to or greater than the legal minimum has not been registered in the Commercial Registry.
After one year without the transformation or dissolution of the company or the increase of its capital having been registered, the administrators shall be jointly and severally liable with the company for the corporate debts.
- The registrar, ex officio or at the request of any interested party, shall record the dissolution by operation of law on the company’s file.
Dissolution agreed in the General Meeting The dissolution agreed in the General Meeting shall occur due to the existence of a legal or statutory cause duly verified by the general meeting or by judicial resolution, whose causes are as follows according to Article 363 of the Capital Companies Act.
- A capital company must be dissolved:
- a) Due to the cessation of the activity or activities that constitute the corporate purpose. In particular, it shall be understood that cessation has occurred after a period of inactivity exceeding one year.
- b) Due to the completion of the business that constitutes its object.
- c) Due to the manifest impossibility of achieving the corporate purpose.
- d) Due to the paralysis of the corporate bodies in such a way that their operation becomes impossible.
- e) Due to losses that reduce the net assets to an amount less than half of the share capital, unless it is increased or reduced accordingly, and provided that it is not appropriate to request the declaration of bankruptcy.
- f) Due to reduction of the share capital below the legal minimum, which is not a consequence of compliance with a law.
- g) Because the nominal value of the shares without voting rights or the shares without voting rights exceeds half of the paid-up share capital and the proportion is not restored within two years.
- h) For any other cause established in the bylaws.
Liquidation is the phase following the dissolution of a limited liability company in which a series of actions are carried out to liquidate it and distribute its assets. During this phase, the company will maintain its legal personality and must add the expression "in liquidation" to its name.
First, the administrators will cease in their positions and will not have powers of representation. Subsequently, the liquidators will be appointed, who will normally coincide with the administrators unless another person has been designated in the bylaws.
In the event that the dissolution occurs due to the opening of the liquidation phase of the company in bankruptcy proceedings, the liquidators will not be appointed and what is established in the Bankruptcy Law will be maintained.
- Prepare an inventory and a balance sheet of the company on the date of dissolution within a period of three months from the start of liquidation.
- Conclude pending operations and new ones according to the needs of the liquidation.
- Collect the credits and pay the corporate debts.
- Keep the accounting records and preserve them.
- Dispose of the corporate assets.
- Inform the partners and creditors of the status of the liquidation.
- Replace the liquidators in case the duration of the liquidation is exceeded.
- Establish a final liquidation balance sheet.
- Divide the corporate assets.
- Right to the liquidation quota of the partners.
- Make the payment of the liquidation quota.
What is the Cost of Dissolving and Liquidating a Limited Liability Company?
The dissolution and liquidation of a limited liability company can represent a significant cost for the partners and administrators of the company. Below, we explain the main costs that may arise in this process:
- Formalization expenses: The dissolution and liquidation of a limited liability company involves a series of expenses associated with the formalization of the procedures. These expenses may include, among others, the notarial fees for the formalization of the dissolution and liquidation deed, the registration costs associated with the inscription in the Commercial Registry, as well as the costs of an advisor who plans and advises on the matter.
- Labor costs: If the company has employees, it is necessary to consider the labor costs associated with the termination of employment contracts, such as the payment of indemnities and pending salaries.
- Taxes: The dissolution and liquidation of a limited liability company may generate taxes associated with the sale of the company’s assets and the distribution of assets among the partners. In Spain, for example, the dissolution and liquidation of a limited liability company may be subject to taxes such as the Corporate Income Tax or the Tax on Property Transfers and Documented Legal Acts.
- Liquidation costs: During the liquidation phase, the liquidators have the obligation to collect the credits and pay the corporate debts, which may generate costs associated with the disposal of assets or the hiring of third-party services.
- Liquidation fees: In some cases, the liquidators may charge fees for their services, which may represent an additional cost for the company.
In short, the total cost of the dissolution and liquidation of a limited liability company will depend on many factors, such as the balance sheet balance, the size of the company, its financial situation, and the number of employees it has. Therefore, it is important to have specialized advice like that provided by notaria-online.com to know in advance the costs associated with this process and to plan the dissolution and liquidation of the company in the most efficient way possible.
It is important to highlight that throughout this process, the liquidators have the responsibility to act with diligence and care in the performance of their functions, as they will be liable to the company and the creditors in case of non-compliance or malpractice.
At notaria-online.com we have a team of professionals specialized in commercial and tax law, so we can offer comprehensive advice in all phases of the liquidation process of a limited liability company in Spain.
If you need more information or wish to request our services, do not hesitate to contact us through our phone 910 624 354, the forms on the website, our email [email protected] or our assistant in the website chat. We are at your disposal to help you. Call now.
