The cessation of a company’s activity and the extinction of a company are two terms that can lead to confusion because, although they seem similar, they are totally different. We are going to explain exactly what the cessation of activity is, and we will compare it to the extinction of a society, explaining what this process consists of.
Cessation of activity:
It is the action by which the owner of a company decides to temporarily suspend the business activity.
This does not mean that the company ceases to exist, since the activity can be resumed at any time, only that it is inactive for a period of time.
This inactivity does not cause the company to lose its legal entity, although it will not be able to issue invoices for the delivery of goods or the rendering of services inherent to the business activity.
In spite of carrying out the cessation of activity, the company must continue to prepare the accounting of the business, as stated in the Code of Commerce and General Accounting Plan, as well as continue legalizing the books and depositing them in the annual accounts of the Mercantile Registry.
In addition, with the cessation of activity, the company must continue to present the Corporate Tax, the periodic returns for the withholding obligations that the company continues to have, the VAT declaration of the invoices that were made when the company was active, and the annual informative statements.
Extinction of the company
It is the process by which the owner of a company carries out the relevant formalities to close the company. For the extinction of the company, it must follow a process composed of acts provided in the legislation and which are mandatory:
- Dissolution: The entrepreneur must dissolve the company in the first place in order to begin the liquidation process of the company and, with it, its extinction. The dissolution paralyzes the ordinary activity of the company in order to give way to liquidation.
The effects of a dissolution are:
- The company immediately enters the liquidation process. It must include in its name as a company the phrase “in liquidation”,
- the lucrative activity of the company is suspended,
- the administrative body disappears,
- if the liquidation process takes longer than one year, the annual balance sheet is replaced by an account statement.
The equity obtained from the collection of the outstanding debts and the payment of the social debts is distributed among the partners of the company. The liquidators can be appointed by the General Board or be designated by the provisions of the statutes. Thus, the liquidation process will be carried out in accordance with the provisions established in the Articles of Association stated in the General Shareholders Board.
Once the liquidation of the company has been completed, the liquidators will show the General Shareholders Board a series of documents for their approval. These documents are: a final balance sheet, a complete report on the operations carried out and a project of division among the partners of the resulting asset.