The dissolution and liquidation process: a legal guide for entrepreneurs

The dissolution and liquidation process: a legal guide for entrepreneurs

Closing a company is a difficult decision, but when the time comes, it is essential to get it right. In Spain, the dissolution and liquidation of a Limited Company (SL) is not resolved by simply ceasing to trade. There is a legal process that must be followed to ensure that the company is extinguished correctly, leaving no outstanding issues with the Tax Agency, the Commercial Registry or potential creditors. This guide is designed to help you understand that path step by step.

What does it mean to dissolve and wind up a company?

Dissolution is the legal act by which it is decided to end the life of a company. However, the company does not automatically disappear on dissolution: it enters a state of liquidation. During this phase, the company can no longer continue its usual activity, and its sole objective becomes the orderly winding up of its economic and legal operations.

Liquidation involves paying debts, collecting what is owed to the company, selling its assets and distributing what remains among the shareholders. Finally, extinction takes place, which is the definitive disappearance of the company as a legal entity.

Most common causes of dissolution

There are many reasons why a company may decide to dissolve. Some of the most common are:

• The voluntary decision of the shareholders, taken at a general meeting.
• Serious losses that leave the net assets below half of the share capital.
• Cessation of activity for more than one year.
• Impossibility of fulfilling the corporate purpose for which the company was created.
• Internal conflicts that block the normal functioning of the governing bodies.
• Specific causes may also be established in the articles of association, such as a limited duration or the achievement of a specific objective.

The dissolution resolution and the role of the liquidators

Once the cause for dissolution has been detected, the company must convene a general meeting of shareholders to approve the formal dissolution resolution. At the same meeting, the liquidators are appointed, who replace the administrators and are in charge of directing the liquidation process, the name of the company is changed to ‘in liquidation’, and the form of liquidation of the company is approved.

This resolution must be formalised in a public deed before a notary and registered in the commercial register. From this moment on, the company officially enters into liquidation and must indicate this in all its documentation (invoices, mailings, communications, etc.).

The liquidators assume important responsibilities, as they must act in the interests of the company and all those involved. Their role is to control the assets of the company, collect receivables, pay debts and distribute the remainder, if any, to the shareholders.

The liquidation phase

During this phase, the liquidators must draw up an inventory and a balance sheet of the company at the date of dissolution. This document is the starting point for all subsequent actions.

Then the practical work begins: selling assets, settling outstanding contracts, dealing with creditors and settling taxes. If there is no liquidity available to meet the debts, it may be necessary to resort to insolvency proceedings. If, on the other hand, there are surpluses after all liabilities have been settled, the remaining assets are distributed among the shareholders according to their shareholding.

The final liquidation balance sheet, once approved by the general meeting, is also set out in a new public deed that is filed with the commercial registry, marking the definitive closure of the company.

Subsequent formalities and aspects to bear in mind

Once the whole process has been completed, it is essential to notify the Tax Agency and Social Security of the cancellation of the company, submitting the corresponding forms (such as form 036). In addition, it is necessary to ensure that the latest tax obligations, such as corporate income tax or VAT returns, have been fulfilled up to the last day of activity.

A key aspect that should not be overlooked is that liquidators may incur liabilities if they act negligently, especially if they harm creditors or Shareholders.

The orderly winding up of a company is an act of liability. It is not only a question of ending a stage of the company, but also of doing so in a correct manner, complying with the law and avoiding negative consequences in the future. Whether the decision is made of one’s own free will or forced by the economic situation, carrying out all the formalities with rigour allows the cycle to be closed with peace of mind.