Dissolution, liquidation and extinction: three phases that are not the same
Dissolution is the decision to bring the company to an end, adopted by the shareholders' meeting. Liquidation is the subsequent phase: debts owed to you are collected, debts you owe are paid and the surplus is distributed among the shareholders. Extinction is the end: the cancellation of the company in the Commercial Registry, from which point it ceases to exist.
Order matters. If you distribute money to shareholders before paying creditors, the transaction can be annulled and the shareholders are liable for what they received. First you pay, then you distribute.
When dissolution is required: the legal grounds
The Capital Companies Act (article 363) requires dissolution in cases such as cessation of activity, completion of the corporate purpose, losses that leave net equity below half of the share capital, reduction of capital below the legal minimum or paralysis of the corporate bodies.
If a ground applies, the director must call the shareholders' meeting within two months. If the meeting does not resolve to dissolve, any interested party may request judicial dissolution.
The process step by step
The full journey, in order: the meeting approves the dissolution (at a universal meeting if all shareholders are present and accept, or at a formally convened meeting); a public deed of dissolution is executed; a liquidator or liquidators are appointed; the liquidator closes the opening balance sheet, collects, pays and distributes; the meeting approves the liquidation accounts and the final balance sheet; and finally the deed of extinction is executed and the entries in the Commercial Registry are cancelled.
Before extinction, the dissolution must be notified to creditors and the announcement published in the BORME and on the corporate website, so that any interested party can file claims.
Taxes and formalities that must be closed beforehand
The company must file its final Corporate Tax return (form 200, even if nil), the final VAT self-assessment (form 303), the cessation of activity in the census of entrepreneurs (form 036 or 037) and the corresponding deregistrations with Social Security, in addition to cancelling the IAE if it was registered.
The tax closure is done before extinction, not after. If the company is extinguished with outstanding obligations, the directors may end up being liable with their own assets.
Timelines, costs and what usually goes wrong
For a company with no debts or complicated assets, the whole process usually takes between four and six months: general meeting, deed, liquidation period and deregistration at the Companies Registry. Notary, BORME and registry costs for a simple SL with no property stay in the range of a few hundred euros; they rise if there are properties or transfers to settle.
The typical mistakes are filing the final tax return incorrectly or late, forgetting to deregister employees (they must be made redundant or transferred before dissolution), distributing funds before paying creditors, and leaving the company dormant with VAT still to be settled.
And a warning: if the assets are not enough to pay the creditors, ordinary dissolution is not an option. In that case the route is insolvency liquidation.
