# What Is Winding Up? How Does It Differ From Bankruptcy?

![Winding Up: Liquidating the assets of a business that has ceased operations.](https://www.investopedia.com/thmb/9lvokylcDHUyEjKixriBTZGEwns=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/windingup.asp-final-5f172fd6c53141fc8217925e5b125738.png)

*— Investopedia / Theresa Chiechi*

## What Is Winding Up?

Winding up is the process of liquidating a company. A company that winds up ceases to do business as usual. Its sole purpose is to sell off stock, pay off creditors, and distribute any remaining assets to its partners or [shareholders](https://www.investopedia.com/terms/s/shareholder.asp). The term winding up is synonymous with [liquidation](https://www.investopedia.com/terms/l/liquidate.asp), which is the process of converting assets to cash.

### Key Takeaways

*   Winding up refers to the process of liquidating the assets of a business that has ceased operations.
*   The sole purpose of a business that is winding up is to sell off assets, pay off creditors, and distribute any remaining assets to the owners.
*   The two main types of winding up are compulsory winding up and voluntary winding up.
*   Winding up a business is not the same as bankruptcy, although it is usually a result of bankruptcy.

## How Winding Up Works

Businesses that experience financial distress may need to make important decisions about their future. This may be due to economic conditions, a lack of capital, bad management, unsuccessful marketing, and/or other risk factors. At some point, they may decide to stop (or be forced to stop) their day-to-day operations.

There are several ways that a business can cease operations, including winding up. Winding up a business is a legal process regulated by corporate laws as well as a company's [articles of association](https://www.investopedia.com/terms/a/articles-of-association.asp) or partnership agreement. Winding up can be compulsory or voluntary and can apply to [private and public companies](https://www.investopedia.com/ask/answers/difference-between-publicly-and-privately-held-companies/).

The following are just some of the steps that a business must take during the process of winding up:

*   Notifying and paying creditors
*   Filing and paying final [tax returns](https://www.investopedia.com/terms/t/taxreturn.asp)
*   Submitting final financial reports
*   Closing accounts, including bank accounts and credit cards
*   Terminating business licenses and open permits  
    

Winding up is permanent and cannot be reversed. Once a company initiates the process, it must cease operations completely, which means it can no longer do business as usual. After a company is done winding up, it must completely dissolve. Dissolution, which precedes the winding up process, involves filing paperwork to shut down the company's [organizational structure](https://www.investopedia.com/terms/o/organizational-structure.asp).

## Types of Winding Up

### Compulsory Winding Up

A company can be legally forced to wind up by a court order. In such cases, the company is ordered to appoint a [liquidator](https://www.investopedia.com/terms/l/liquidator.asp) to manage the sale of assets and distribution of the proceeds to creditors.

The court order is often triggered by a suit brought by the company's creditors. They are often the first to realize that a company is [insolvent](https://www.investopedia.com/terms/i/insolvency.asp) because their bills have remained unpaid. In other cases, the winding-up is the conclusion of a [bankruptcy](https://www.investopedia.com/terms/b/bankruptcy.asp) proceeding, which can involve creditors trying to recoup money owed by the company.

In any case, a company may not have sufficient assets to satisfy all of its debtors entirely, and the creditors will face an economic loss.

### Voluntary Winding Up

A company's shareholders or partners may trigger a voluntary winding up. This is usually done by passing a resolution. If the company is insolvent, the shareholders may trigger a winding-up to avoid bankruptcy and, in some cases, personal liability for the company's debts.

Even if it is [solvent](https://www.investopedia.com/terms/s/solvency.asp), the shareholders may feel their objectives have been met, and it is time to cease operations and distribute company assets.

In other cases, market situations may paint a bleak outlook for the business. If the [stakeholders](https://www.investopedia.com/terms/s/stakeholder.asp) decide the company will face insurmountable challenges, they may call for a resolution to wind up the business. A subsidiary also may be wound up, usually because of its diminishing prospects or its inadequate contribution to the parent company's bottom line or profit.

## Winding Up vs. Bankruptcy

Winding up a business is not the same as bankruptcy, though it is usually a result of bankruptcy. Bankruptcy is a legal proceeding that an entity pursues when they can no longer pay their debts or financial obligations.

In bankruptcy proceedings, creditors attempt to gain access to a company's assets so that they can be liquidated to pay off debts. Although there are various types of bankruptcy, the proceedings can help a company emerge as a new entity that is debt-free and usually smaller.

Once the winding-up process begins, a company can no longer pursue business as usual. The only action it may attempt is to [complete the liquidation](https://www.investopedia.com/ask/answers/050115/what-happens-shares-company-has-been-liquidated.asp) and distribute its assets. At the end of the process, the company is dissolved and ceases to exist.

> **Important**
>
> Dissolution and liquidation are two other legal processes that companies undergo when they experience financial distress. Dissolution involves filing paperwork to dissolve the business while liquidation involves selling off assets when a company is insolvent.

## Example of Winding Up

Shoe retailer Payless filed for bankruptcy in April 2017, almost two years before the business finally ceased operations. The company shut down about 700 stores and repaid about $435 million in debt under court supervision. Four months later, the court allowed it to emerge from bankruptcy.

It continued to operate until February 2019, when it abruptly shut down its remaining 2,500 U.S. stores and filed again for bankruptcy, effectively beginning the winding-up process. It also wound down its [e-commerce](https://www.investopedia.com/terms/e/ecommerce.asp) business. The liquidation in 2019 did not have any effect on its Latin American operations, which became its new focus when the company emerged from bankruptcy in 2020.

The company also began to expand in the U.S. that year, opening more stores, as it felt there was an opportunity for its goods.

Some other examples of well-known American companies that were liquidated, or wound up, include

*   Circuit City
*   RadioShack
*   [Blockbuster](https://www.investopedia.com/articles/investing/072115/companies-went-bankrupt-innovation-lag.asp)
*   Borders Group

All of these retailers were in deep [financial distress](https://www.investopedia.com/terms/f/financial_distress.asp) before filing for bankruptcy and agreeing to liquidate.

## What Is the Difference Between Winding Up and Dissolution?

Winding up and dissolution are both steps in the closing of a business. Winding up comes after dissolution, which involves filing paperwork to formally dissolve the company. Winding up refers to closing the operations of a business, selling off assets, paying off creditors, and distributing any remaining assets to the owners. Once the dissolution process is initiated, the winding-up process comes into play. After winding up, the company formally ceases to exist.

## What Are the Legal Consequences of Not Dissolving a Business?

If you do not legally dissolve a business, you can incur taxes and penalty fees. These taxes and fees can be incurred even if your business is not operating or earning any revenue/income. When a business has determined it will no longer operate and it has wound up operations, it must legally dissolve.

## How Long Does It Take to Wind Up a Business?

There are multiple steps in winding up a business. It takes approximately two to three months to enter the liquidation process. From there, the liquidation process can last a few months to a year, depending on how long it takes to sell off assets.

## The Bottom Line

Companies close for many reasons, either because they enter bankruptcy, are legally required to, or decide to sell off a non-profitable business voluntarily. When this happens, the process of winding up begins, which is the complete cessation of business activities and the selling off of assets.

> **Article Sources**
>
> 1.  PacerMonitor. "[In re: Payless Holdings LLC, et al](https://www.pacermonitor.com/view/6PLR3DI/Payless_Holdings_LLC__moebke-19-40883__1460.0.pdf)." Pages 13, 15-17.
>     
> 2.  Business Wire. "[Payless ShoeSource Emerges From Bankruptcy With New Executive Team](https://www.businesswire.com/news/home/20200116005047/en/Payless-ShoeSource-Emerges-Bankruptcy-New-Executive-Team)."
>     
> 3.  PR Newswire. "[Iconic Payless Brand Relaunches in North American Market](https://www.prnewswire.com/news-releases/iconic-payless-brand-relaunches-in-north-american-market-301113809.html)."