What does the term "liquidation" refer to in corporate context?

In a corporate context, "liquidation" refers to converting corporate assets into cash for redistribution, typically following the closure of the business or during a bankruptcy process. This is necessary to pay off creditors and stakeholders before any remaining assets may be distributed to the shareholders. During liquidation, the company ceases operations, and its assets, such as inventory, equipment, and real estate, are sold off to generate cash. The proceeds from these sales are then used to pay debts in a prioritized manner according to legal obligations and agreements.

Liquidation is distinct from other processes in corporate finance, such as settling partnership debts, which deals more with partnerships rather than corporations. It is also not a method to increase company equity, as liquidation indicates that the company is winding down rather than trying to grow or enhance its financial position. Furthermore, the formation of a new business entity is a completely different process that involves starting up rather than dismantling the current company's operations and converting its assets into cash.