The Snag After the conversion, the corporation found that it could not raise the desired capital at an acceptable cost as long as its operations included a particular business unit.
Accordingly, the corporation planned to engage in a “rescission transaction,” consisting of filing a “certificate of conversion” with the state to convert the corporation into a limited liability corporation (LLC).
Finally, shareholders receive any remaining assets, in the unlikely event that there are any.
In such cases, investors in preferred stock have priority over holders of common stock.
Assets are distributed based on the priority of various parties’ claims, with a trustee appointed by the Department of Justice overseeing the process.
The most senior claims belong to secured creditors, who have collateral on loans to the business.
These lenders will seize the collateral and sell it—often at a significant discount, due to the short time frames involved.
The debt will remain until the statute of limitation has expired, and as there is no longer a debtor to pay what is owed, the debt must be written off by the creditor.Liquidation can also refer to the process of selling off inventory, usually at steep discounts.It is not necessary to file for bankruptcy to liquidate inventory.Further, while the corporation could first convert into a partnership and then into an LLC, it would incur greater expense than if the corporation converted directly into an LLC.Moreover, the IRS pointed out that the proposed transaction would be completed by the end of the 2009 taxable year, which would be within the same taxable year as the conversion of the partnership into a corporation.