There are a few reasons a company director might consider closing their limited company. They might be looking to retire or to go into an employee (PAYE) role. Or the company might be making severe losses and have debts it can’t pay. So it is no longer viable to keep trading.
Whatever the reason, if you are looking to close a limited company, you will need to know what your options are to find the best one for you.
Step 1: Determine whether your company is solvent vs. insolvent
The first step is to determine whether your limited company is solvent or insolvent. This will determine what options are open to you.
A company that is solvent is one that can pay its bills when they are owed. Cover its daily costs and has assets that outweigh its liabilities.
A company that is insolvent cannot pay its bills or debts, cover its daily costs and has liabilities that are greater than its assets.
How to close a solvent limited company – Members’ Voluntary Liquidation (MVL)
Members’ Voluntary Liquidation is an option open to solvent companies (i.e. ones with no debts they can’t pay) which formally winds-up and closes the business.
An MVL is normally the best option when a company has assets of £25,000 or more.
MVL is a completely voluntary process that is initiated by company directors and shareholders at a time that is right for them.
To undergo the MVL process, the company director will need to call a meeting with company shareholders. Following this, a licensed Insolvency Practitioner must legally be appointed to oversee and carry out the process.
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There are many benefits to an MVL, the biggest being that it is HMRC approved and therefore a tax-efficient way of winding-up a business. With an MVL any funds taken out of the company are subject to Capital Gains Tax (not Income Tax) – set at 10%.
This is a lot less than the level of Income Tax – 18% for the basic level and 28% for the higher level.
There are also more advantages for directors who qualify for Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief). If directors are eligible, they can liquidate all or part of the company and pay 10% in Capital Gains Tax on profits over the lifetime of business up to a limit of £1 million. This can save directors a significant sum on their tax bill.
How to close an insolvent company – Creditors’ Voluntary Liquidation (CVL)
If your limited company is insolvent, however, a CVL is likely to be the better option for you.
Creditors’ Voluntary Liquidation is another form of voluntary liquidation, however, unlike an MVL, this is a route for insolvent companies when it is no longer feasible for them to keep going.
Like an MVL, a CVL is a completely voluntary process that is initiated by the company directors and shareholders. This is a route usually taken by a company when they no longer have a viable future and the director has decided it is time to take control in order to avoid being forced into compulsory liquidation.
There are many benefits to a CVL. Firstly, it shows that the director is taking actions to stop the situation from getting any worse. What’s more, by opting for a CVL, the director can prevent their company from being forced into compulsory liquidation, the most serious form of liquidation.
Considering closing a limited company? Let Clarke Bell help
Whether your company is solvent or insolvent, if you think it might be the right time to close it down, Clarke Bell can help you.
Our team have helped thousands of companies to successfully go through the liquidation process, whether that is through Members’ Voluntary Liquidation or Creditors’ Voluntary Liquidation. We will work closely with you to get to know your situation and find the best route forward for you.
To see how we can help you, why not get in touch today?