Liquidation surplus

What it means

The liquidation surplus is what remains of the company once its assets have been realised and every liability settled. It is the final state of equity turned into cash and divided among the members.

It is neither profit nor a dividend: it also contains the returned contribution and retained earnings of earlier years. So it is not distributed by a decision on profit but by a proposal the liquidator draws up at the very end.

The liquidation balance can also be zero: the assets just cover the liabilities and the shareholders receive nothing. It cannot be negative, though. If liabilities turn out to exceed assets, that is not a balance with a minus sign but insolvency, and the liquidation turns into bankruptcy with all the consequences for shareholders and the liquidator.

How it works in practice

As at the day the liquidation closes, the liquidator prepares the accounts, a final report on how it went and a proposal for distributing the surplus. The general meeting approves all three, and only then is the application to strike the company off filed.

The surplus is normally split in proportion to paid-up contributions unless the articles set another rule. Tax on a share of it follows a regime close to that for profit shares, and depends on when the business share was acquired and whether the member is an individual or a company.

The final income tax or VAT return often ends in a tax refund that reaches the account only several weeks later. When preparing the proposal for distributing the balance, we plan for it in advance, so the liquidator does not have to hold back the payout and the refund is not sent to an account that has closed in the meantime.

What to watch out for

Paying the surplus out before tax and liabilities are settled is the most expensive move in the whole liquidation. The tax administrator’s consent to the strike-off never arrives, the company has to keep existing, keep books and file returns, and the members pay the money back.

Forgotten small liabilities, such as a final energy bill or arrears in social contributions, sometimes surface only after the balance has been paid out. A creditor who was not paid can then turn to the shareholders up to what they received from the balance. Before the payout, all contracts, standing orders and recent statements are therefore reviewed.