# What Is Voluntary Liquidation?

![Voluntary Liquidation](https://www.investopedia.com/thmb/FKfwRGpDykuvfJOZgC-2mFPK3BU=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Term-v-voluntary-liquidation_Final-b3d331e692534ac8b97ea50e1ac048e7.png)

*— Ryan Oakley / Investopedia*

> **Definition**
>
> Voluntary liquidation dissolves and dismantles solvent companies.

## What Is Voluntary Liquidation?

A voluntary [liquidation](https://www.investopedia.com/terms/l/liquidation.asp) is a self-imposed windup and dissolution of a company [shareholders](https://www.investopedia.com/terms/s/shareholder.asp) have approved. This decision is made by an organization’s leadership who decides that the [company](https://www.investopedia.com/terms/c/company.asp) will dissolve. It is not a compulsory order by a court. Voluntary liquidation terminates a company’s operations, wraps up its financial affairs, and dismantles its [corporate structure](https://www.investopedia.com/articles/basics/03/022803.asp) while paying back [creditors](https://www.investopedia.com/terms/c/creditor.asp) according to their priority.

### Key Takeaways

*   A voluntary liquidation terminates a corporation by selling its assets and settling its outstanding financial obligations.
*   The purpose is to cash out of a business that does not have a viable future or has no other purpose in remaining operational.
*   A voluntary liquidation is not mandated by a court or regulatory body.

## Voluntary Liquidation Process

A voluntary liquidation resolution must be initiated by a company’s [board of directors](https://www.investopedia.com/terms/b/boardofdirectors.asp) or ownership. The process begins after a resolution to cease operations approved by the company’s shareholders. The shareholder vote is commonly followed by the appointment of a liquidator who will liquidate [assets](https://www.investopedia.com/terms/a/asset.asp) to free up funds to pay [debts](https://www.investopedia.com/terms/d/debt.asp), file current tax returns, and distribute excess funds to shareholders.

The reasons for a voluntary liquidation are numerous. It may happen due to unfavorable business conditions, such as operating at a loss, changes in market conditions, or business strategy considerations. Ownership may want to exact a degree of [tax relief](https://www.investopedia.com/terms/t/tax-relief.asp) for shutting down or decide to reorganize and transfer assets to another company in exchange for an ownership or [equity stake in the acquiring company](https://www.investopedia.com/amazon-stake-grubhub-5525243).

> **Important**
>
> Voluntary liquidation is contrary to forced liquidation, which involves the involuntary sale of assets or securities to create liquidity due to an unforeseen or uncontrollable situation.

## Procedures in Other Countries

In the United States, a voluntary liquidation may begin with an event as specified by a company’s board of directors. In such cases, a [liquidator](https://www.investopedia.com/terms/l/liquidator.asp) who answers to shareholders and creditors is appointed. If the company is solvent, the shareholders may supervise the voluntary liquidation.

If the company is not solvent, creditors and shareholders may control the liquidation process by getting a court order. Unless the U.S. [Comptroller of the Currency](https://www.investopedia.com/terms/o/office-comptroller-currency-occ.asp) waives this requirement, stockholders owning two-thirds of the company’s shares must vote in favor of the voluntary liquidation.

Voluntary liquidations in the United Kingdom are divided into two categories. One is the creditors’ voluntary liquidation, which occurs under a state of corporate [insolvency](https://www.investopedia.com/terms/i/insolvency.asp). The other is the members’ voluntary liquidation, which only requires a corporate declaration of [bankruptcy](https://www.investopedia.com/terms/b/bankruptcy.asp).

Under the second category, the firm is solvent but needs to liquidate its assets to meet its upcoming obligations. Stockholders owning three-quarters of a company’s shares must vote in favor of a voluntary liquidation resolution for the motion to pass.

## What Are the Tax Procedures During Voluntary Liquidation?

Corporations that choose voluntary liquidation must file IRS Form 966, Corporate Dissolution or Liquidation to dissolve the corporation or liquidate any of its stock. Additionally, corporations may need to file IRS Form 4797, Sales of Business Property if they sell or exchange property used in their business, and Form 8594, Asset Acquisition Statement, if they sell their business.

## Who Institutes a Voluntary Liquidation?

The company’s ownership or board of directors must initiate the process, but generally, the decision must be approved by a vote of those holding either two-thirds of the company’s shares (U.S.) or three-fourths of them (U.K.).

## What Is an Exit Strategy?

A business [exit strategy](https://www.investopedia.com/terms/b/business-exit-strategy.asp) is a strategic plan for a business owner or corporation to sell ownership in a company to investors or another company. An exit strategy gives a business owner a way to liquidate their stake in a business and limit losses.

## The Bottom Line

Voluntary liquidation is a process by which a company ceases doing business without a court order requiring dissolution. The process is slightly different in the U.S. and the U.K., but both require that the board of directors institute the process and that a specified percentage of shareholders approve it. Depending on the situation, a company’s creditors may also be involved in instigating or carrying out the liquidation.

> **Article Sources**
>
> 1.  Deloitte. "[Members Voluntary Liquidation Corporate Simplification](https://www.deloitte.com/ie/en/services/financial-advisory/services/members-voluntary-liquidation.html)."
>     
> 2.  U.S. Department of Justice. "[Liquidation Procedures for Corporate Law](https://ojp.gov/ncjrs/virtual-library/abstracts/liquidation-procedures-corporate-law)."
>     
> 3.  Cornell Law School, Legal Information Institute. “[12 CFR § 710.2—Responsibility for Conducting Voluntary Liquidation.](https://www.law.cornell.edu/cfr/text/12/710.2)”
>     
> 4.  Cornell Law School, Legal Information Institute. “[12 U.S. Code § 181—Voluntary Dissolution; Appointment and Removal of Liquidating Agent or Committee; Examination](https://www.law.cornell.edu/uscode/text/12/181).”
>     
> 5.  McTear Williams & Wood. “[A Guide to Members’ Voluntary Liquidations](https://www.mw-w.com/a-guide-to-members-voluntary-liquidations).”
>     
> 6.  Internal Revenue Service. "[Closing a Corporation](https://www.irs.gov/newsroom/closing-a-corporation#:~:text=They%20must%20file%20Form%20966,liquidate%20any%20of%20its%20stock.)."