Analyze the effects of liquidation on the liquidating corporation
In venture capital contracts, a sale of the company is often deemed to be a liquidation event.
In finance and economics, liquidation is an event that usually occurs when a company is insolvent, meaning it cannot pay its obligations as and when they come due. Bankruptcy Code governs liquidation proceedings; solvent companies can also file for Chapter 7, but this is uncommon.
More specifically, liquidation preference is frequently used in venture capital contracts to specify which investors get paid first and how much they get paid in the event of a liquidation event, such as the sale of the company.
In its broadest sense, liquidation preference determines who gets how much when a company is liquidated, sold or goes bankrupt.
The character of gain or loss recognized by the S shareholder depends on whether the stock is a capital asset in the shareholder’s hands and whether the transaction constitutes a complete or a partial liquidation of the corporation.
Long-term or short-term classification of a liquidation that qualifies for capital gain treatment depends on the shareholder’s holding period, with long-term status having significant importance due to the 15% tax rate cap on long-term capital gains.
This is not the same as its debts being discharged, as happens when an individual files for Chapter 7.FREE TRIAL Tax Management Portfolio, Corporate Liquidations, No. 784-3rd, analyses the tax considerations in connection with the liquidation of a corporation. Evolution of the Tax Treatment of Corporate Liquidations B. The Portfolio highlights traps for unwary taxpayers and discusses planning opportunities in connection with a corporate liquidation. Liquidation preference determines the payout order in case of a corporate liquidation.
The most senior claims belong to secured creditors, who have collateral on loans to the business.