Dissolving a limited company is a significant legal process that marks the beginning of its extinction; however, in practice it continues to raise many questions, especially regarding the distinction between ceasing activity, keeping the company dormant or properly dissolving and liquidating it in accordance with the law.
This article analyses, from a legal perspective, the concept of company dissolution, its applicable regulatory framework and the main phases of the procedure until the company is finally extinguished, as well as the fundamental differences with other common situations in business practice.
What is the dissolution of a limited company?
The dissolution of capital companies is regulated in article 360 of the Capital Companies Act (LSC) and could be defined as the legal act by which the company ceases its ordinary activity and enters the liquidation phase, with the aim of being definitively extinguished.
It should be noted that dissolution does not imply the immediate disappearance of the company, but rather the start of a subsequent process — liquidation — during which the actions necessary to organise its closure are carried out.
During this phase, the company retains its legal personality, although limited exclusively to operations specific to the liquidation, such as realising assets, paying debts and, where applicable, distributing the assets among the shareholders.
However, in cases where the company has no debts or has previously paid them off, it is possible to carry out a dissolution with simultaneous liquidation, which significantly simplifies the process.
Grounds for dissolving a limited company
Dissolution may be for legal or voluntary reasons.
Voluntary dissolution
The most common form of dissolution is so-called voluntary dissolution, which occurs when the shareholders, meeting at the General Meeting, agree to dissolve the company.
This is a legitimate business decision that does not require any specific grounds beyond the will of the shareholders.
Dissolution for legal reasons
Although the company may be dissolved voluntarily by agreement of the shareholders, the Law establishes a series of cases in which the company must be dissolved. The main grounds include:
- Cessation of activity: if the company ceases its activity/activities for a period of more than one year, the law requires the limited company to be dissolved.
- Completion of the business or impossibility of achieving the corporate purpose: another ground for dissolution would be where the company has fulfilled the purpose for which it was set up or it is impossible to achieve it. These are usually cases in which the company was created for a specific project or purpose that has already been fulfilled or has become unfeasible.
- Paralysis of the corporate bodies: When a deadlock arises that prevents the normal functioning of the company, such as the impossibility of adopting resolutions at the General Meeting or in the management body, the law requires the limited company to be dissolved (i.e. joint directors who cannot adopt resolutions due to disagreements between them, or a General Meeting where the shareholders each hold 50% of the share capital and none has a sufficient majority to adopt resolutions).
- Due to losses that reduce equity: When losses reduce equity to less than half of the share capital, the law requires the company to be dissolved, unless this financial imbalance is resolved (i.e. capital increase or reduction).
- In addition to the above cases, the articles of association themselves may establish specific grounds for dissolution, or they may be established by other legal provisions.
When there is a legal ground for dissolution it is important to bear in mind that the directors have an obligation to call a General Meeting within two months to adopt the dissolution resolution or, where appropriate, remove the cause.
In the event of non-compliance, they may incur personal liability for the company's debts, as provided for in article 367 LSC.
Difference between a dormant company and a dissolved company
One of the most common mistakes in business practice is to consider that a company ceases to exist simply because it is not carrying out any activity or has deregistered from the business census by filing the corresponding form 036/037.
However, these actions do not imply the extinction of the company from a legal point of view, which can generate significant risks.
Dormant company or deregistration from the business census
When a company ceases its activity or deregisters from the Tax Agency, it is important to bear in mind some particularly relevant aspects:
- The company continues to exist legally and remains registered in the Commercial Registry, fully retaining its legal personality and capacity to act, even if it carries out no activity.
- As a result, the company remains obliged to comply with its commercial obligations, including bookkeeping, the preparation and approval of annual accounts and the filing of accounts with the Commercial Registry
- In addition, it may also retain residual tax obligations (informative returns, etc.).
In other words, the company continues to exist and will therefore have a series of legal obligations to comply with, so deregistration from the business census does not entail the extinction of the company.
It is also particularly important in these situations to bear in mind that deregistering from the census with the Tax Agency does not entail the extinction of the company. Consequently, if legal grounds for dissolution exist — such as prolonged inactivity or losses that reduce equity below the legal limits — and the directors do not take the legally required measures, they could incur personal liability.
In these cases, and in accordance with the Capital Companies Act, the directors will be jointly and severally liable for the company's debts arising after the grounds for dissolution occurred, if they have not promptly promoted the dissolution of the company or the removal of those grounds.
Dissolved company
By contrast, a dissolved company is one that has formally adopted a dissolution resolution or in which a duly triggered legal ground exists.
The adoption of the dissolution resolution has immediate legal effects insofar as it determines the cessation of the company's ordinary activity; the company stops pursuing its corporate purpose as it had been operating, and its activity is limited exclusively to the operations necessary for its liquidation.
Notwithstanding the above, it is important to note that, during the liquidation phase, although the company has ceased its ordinary activity, its commercial and tax obligations do not disappear but remain, albeit adapted to its new legal situation. In particular, the company remains obliged to keep its accounts in accordance with the applicable regulations, prepare and approve annual accounts until it has been extinguished, and file them with the Commercial Registry. Likewise, certain tax obligations remain, such as filing the relevant tax returns during the liquidation period (Corporate Income Tax, informative returns, etc.).
However, unlike a merely dormant company, during the liquidation phase these obligations are part of an orderly and time-limited process, aimed at extinguishing the company, not at the indefinite continuation of a corporate structure without activity.
Procedure for dissolving a limited company
The process of dissolving a limited company begins with the adoption of the corresponding corporate resolution or, where applicable, with the existence of a duly established legal ground for dissolution.
In general, the procedure includes the following steps:
- Adoption of the dissolution resolution by the General Meeting of shareholders, with the majorities provided for by law or the articles of association, except in cases where dissolution takes place automatically by operation of law.
- Execution of the dissolution resolution as a public deed before a Notary and, where applicable, appointment of the liquidators.
- Registration of the dissolution resolution in the Commercial Registry, from which point the company becomes "dissolved and in liquidation", with effect vis-à-vis third parties.
From that moment, the company's ordinary activity ceases and the liquidation phase formally begins.
The liquidation phases
Once the company has been dissolved, the liquidation phase begins, the purpose of which is to wind up the company's assets until its complete extinction.
- Preparation of an inventory and opening balance sheet: The liquidators must prepare an inventory and balance sheet reflecting the company's financial position at the start of the liquidation.
- Liquidation operations: These include the actions necessary to extinguish the company, including: collecting outstanding receivables, paying the company's debts and, where applicable, disposing of assets
- Preparation and approval of the final liquidation balance sheet: Once the liabilities have been settled, the liquidators will prepare the final balance sheet, which must be approved by the General Meeting.
- Distribution of the remaining assets: The resulting assets will be distributed among the shareholders in proportion to their holding in the share capital, unless otherwise provided.
- Once the operations have been completed, a public deed of extinction of the company will be executed and registered in the Commercial Registry, which will entail the cancellation of the registry entries and the definitive loss of the company's legal personality.
Simultaneous dissolution and liquidation
As indicated above, in certain cases it is possible to carry out the simultaneous dissolution and liquidation of a limited company, significantly simplifying the extinction process.
This mechanism applies when the company is in a simple financial situation, characterised mainly by the absence of debts to third parties or by these having been previously paid.
In these cases, it is not necessary to maintain a prolonged liquidation phase, and all actions can be concentrated in a single formal act. In this case, the phases of the process would be as follows:
- Adoption of the dissolution and liquidation resolution: The General Meeting simultaneously agrees on the dissolution of the company, the approval of the final liquidation balance sheet, the distribution of the remaining assets, if any, and its extinction.
- Finally, the deed of dissolution and liquidation would be executed in a single act and subsequently registered in the Commercial Registry which will entail the cancellation of the registry entries and the definitive extinction of the company.
From a practical point of view, this procedure has clear advantages in terms of speed of execution, cost reduction and simplification
Tax obligations during dissolution and liquidation
One of the aspects that raises the most questions in practice is taxation during the dissolution process, and it must be borne in mind that:
- The company must continue to file Corporate Income Tax until its definitive extinction.
- Obligations relating to VAT, withholdings or other informative returns must also be met, where applicable.
- The distribution of the remaining assets may have tax implications for the shareholders, who must pay Personal Income Tax or Corporate Income Tax depending on their nature.
Consequences of not dissolving a company correctly
From a practical point of view, it is particularly important to note that failing to formally dissolve a company can generate significant legal and financial risks, including:
- Accumulation of formal obligations (filing of accounts, tax returns, etc.).
- Administrative penalties for failure to comply with commercial and tax obligations.
- Personal liability of the directors, especially if there are legal grounds for dissolution and action is not taken in time.
- Generation of latent debts, even in apparently dormant companies.
In this regard, keeping a company "dormant" indefinitely is not only of no practical use, but can become a source of legal contingencies.
Costs and duration of the process
From a practical perspective, the dissolution and liquidation process may involve:
- Notary and registry costs, arising from the execution and registration of the resolutions.
- Professional fees, if external advisors or liquidators are involved.
- Variable duration, which will depend mainly on the complexity of the company's assets and whether or not there are debts.
In cases of simultaneous dissolution and liquidation, the procedure can be completed in a relatively short time, whereas in more complex situations it may take several months.
Conclusion
Dissolving a limited company is a process that requires proper legal and tax planning to avoid liability and ensure an orderly extinction. Ceasing activity is not enough; it is essential to complete all the legal phases until the company is removed from the registry.
Having a lawyer specialised in tax matters or a tax lawyer in Málaga allows tax obligations to be properly managed, while in certain cases it may be advisable to seek advice from a lawyer specialised in mergers to assess prior alternatives.
At MERAC we offer comprehensive support throughout the entire process, guaranteeing legal certainty and peace of mind for shareholders and directors.
