Closing a limited company is a significant decision to make and requires serious consideration.
If you are unsure about whether closing down your company is the best move, it might be better to leave it dormant.
In this guide, Clarke Bell explains what a dormant company is and why a director might leave their company dormant, so you can decide what will be best for you.
What is a dormant company?
A dormant company is one that is inactive and doesn’t have any ‘significant accounting transactions.’ In other words, it is a company that is not trading and doesn’t have any other income, such as from investments.
Although the company is inactive, it still remains on the Companies House register.
If you have set up your limited company and have not yet traded, then the company is classified as dormant. If you have previously traded and want to pause company activities, you must register the company as dormant with HMRC.
How to make your company dormant
There are two main methods to make a company dormant, both of which are fairly straightforward. The method you use will depend on whether you have an already established company, or one yet to be created.
The latter company is the easiest to make dormant. Companies must not be actively trading in order to be considered dormant. As a newly-created company has yet to engage in any trading or other operations, it can be made dormant almost immediately. If you would like to create a company and make it dormant to use at a later date, simply go through the company formation process as normal. Once your new company has been founded, inform HMRC that you would like to make your company dormant, via either a phone call or posting the necessary paperwork. As your company will not have engaged in any trades yet, it will quickly be made dormant.
Making an already established company dormant requires a little more work, though it is ultimately straightforward. You’ll need to make sure your company has wrapped up all existing trades and contracts, or cancel any that are ongoing. If you have any contracts with customers or clients, they must also be cancelled. Any and all liabilities must be paid, including debts, taxes, rent for any company property, employee wages, and so on. If you do have employees, then you must go through the appropriate process to make them redundant. Lastly, you must empty and close all company bank accounts. Once you’ve taken all these steps, your company will be eligible to be made dormant.
At this stage, all you need to do is contact HMRC, either by phone or post, and inform them of your decision to make your company dormant. Assuming you’ve done everything correctly, HMRC will update the status of your company. If not, then HMRC will inform you of additional steps you need to take. When an application to make a company dormant is refused, this is typically down to forgetting to file the last set of company accounts or the latest company tax return, and obstructions can usually be cleared quite quickly. Your company will be considered dormant once you’ve made any necessary amends.
But why would anyone want to make their company dormant in the first place? While there are certainly benefits to other courses of action, there are advantages and disadvantages to having a dormant company.
Firstly, we will look at the advantages:
What are the advantages of leaving a company dormant?
There are several benefits to leaving a company dormant.
Firstly, this is a good option for directors that need to take time off from running their company. Amongst other reasons, this might be because the director falls ill, needs to take a well-earned break, or has to temporarily move abroad.
This allows the director to take a break from the business but return to it at a time that is convenient to them.
In addition to saving time for other projects or to spend with family, directors of dormant companies will also save some money. Corporation tax does not apply to dormant companies, given that there’s no income to tax, so you can safely leave your dormant company on the backburner without burning a hole in your finances.
You also will not be expected to file a company tax return for the duration of your company’s dormancy, though you may have to file other documentation instead. Directors of dormant companies will usually have to submit dormant accounts instead, but this is more of a confirmation that your company is still dormant, rather than a means to get money out of you.
This is also handy for directors that wish to set up a company that they only intend to use in the future. It might be the case that you want to set the company up so it is ready to go when you are, but you have other things to sort out before you start trading.
This also safeguards the company name you have chosen, ensuring that no one else can incorporate a business under the same name.
Another benefit is that there is no limit to the amount of time that you can keep the company dormant. So, if you are unsure how much time you need to take away from the business, there is no time pressure.
This is also an easier and cheaper process than closing down the company altogether.
What are the disadvantages of leaving a company dormant?
Although there are several benefits to having a dormant company, this option also has drawbacks.
For example, the director of a dormant company is still obliged to carry out certain administrative tasks such as filing dormant accounts as well as submitting a Confirmation Statement to Companies House annually.
Therefore, although your company is no longer trading, you will still be obliged to carry out these tasks.
After reading about the advantages and disadvantages of leaving a company dormant, if you have decided that this is not the right option for you, you will need to know about the alternatives. Namely, either making your company active again, or closing down your limited company.
Making a dormant company active
While there are certainly good reasons to make a company dormant, there are also good reasons to reactivate a company once the dormancy has served its purpose. Regardless of your reason for making your dormant company active, you will need to follow a certain procedure to change its status again.
Thankfully, the procedure to reactivate a company is even more straightforward than the procedure to make one dormant. All you need to do is register again for corporation tax and inform HMRC of your intentions to resume operations, or inform HMRC immediately if you have already done so. They will update your company’s status from dormant to active, and corporation tax will once again apply to your company. It is vital that you do not skip this step, as failing to notify HMRC of your company’s return to activity could end in disaster for your company, and your career as a director.
Closing a limited company
If you have decided that you instead want to permanently stop trading and be struck off the Companies House Register, it will instead be better to close the limited company.
If you have reached this decision, the first thing you will need to establish is whether the company is solvent or insolvent, as this will determine the right way to close the limited company.
First, let’s look at how to close a solvent company.
Apply to have the company struck off the Companies House Register
The first option for closing a limited company is to apply to have it dissolved and struck off the Companies House Register.
To be eligible for this route, the company must meet the following criteria:
- It must not have traded or sold any stock in the previous three months
- It must not have changed names in the last three months
- It must not be insolvent
- It must not be threatened with liquidation
- It must not have any agreements with creditors like a Company Voluntary Arrangement (CVA)
To close the company in this way, the director must fill out the DS01 form and return this to Companies House, which will cost just £10.
The other option for solvent companies is to put the company into Members’ Voluntary Liquidation (MVL.)
Close the company in a tax-efficient way with a Members’ Voluntary Liquidation
An MVL is an option open only to solvent companies that have assets over £25,000.
This is a great option for directors who are looking to close their company in a tax-efficient way. By closing a company through an MVL, funds taken out of the business are subject to Capital Gains Tax rather than Income Tax, with further benefits to companies that qualify for Business Asset Disposal Relief.
This means directors can save a small fortune on their tax bill when closing a company in this way.
However, if the company is insolvent, different options will be available.
Closing an insolvent company through Creditors’ Voluntary Liquidation (CVL)
Directors can close their insolvent company through Creditors’ Voluntary Liquidation.
This is a good option for companies that are in debt and owe money to creditors but want to take control of the situation and close the company before the situation gets worse.
Entering into a CVL will mean that the company will avoid being forced into compulsory liquidation, which is the most serious form of liquidation.
Closing an insolvent company through compulsory liquidation
Insolvent companies can also be closed through a different form of liquidation, though one that certainly does not hold a candle to Creditors’ Voluntary Liquidation. This alternative method is compulsory liquidation, and it’s a method you’re likely best off avoiding.
Compulsory liquidation is exactly as it sounds; a method of liquidation that is forced upon a company, rather than one being undertaken by the directors’ own volition. Compulsory liquidation is usually imposed upon a company at the behest of its creditors, rather than one initiated by its directors.
Creditors that aren’t optimistic about their chances of receiving any repayments may settle on compulsory liquidation as a last-ditch effort to recover their money. This can be done by signing and submitting a winding-up petition to the courts. If accepted, the courts can then issue a winding-up order to the company, signalling compulsory liquidation on the horizon. As we mentioned, this is not typically the first port of call for creditors, who will often exhaust all other opportunities before settling on compulsory liquidation.
So far, compulsory doesn’t sound terrible; while it isn’t initiated by directors, it ultimately has the same goal as a CVL. Namely, it aims to liquidate a company’s assets, repay outstanding creditors, and close down the company in question. However, there are two key aspects that make compulsory liquidation decidedly negative.
Firstly, compulsory liquidation removes all control directors have over the company and the liquidation process. Directors cannot appoint a liquidator, have no input over asset disposal, and are generally an afterthought for the duration of the procedure. This total loss of control can be quite disheartening, especially if you have a small number of assets that you’d like to keep or transfer to a new company. That said, this negative point pales in comparison to the next.
The second key negative aspect of compulsory liquidation is vulnerability to certain penalties. Investigations into the company’s finances and director conduct are part of the compulsory liquidation process. These investigations are conducted with the aim of finding evidence of director misconduct. If enough evidence is found to charge a director, it can carry serious penalties with far-reaching implications. These penalties are determined by the Insolvency Service, and include the following:
- Disqualification of a director’s license for between 2-15 years, including other senior positions and companies not owned by the director
- Fines based on the severity of the misconduct
- An order to repay a dividend or loan to the company
- Personal liability for company debt
- Prison sentence
These penalties can be quite detrimental to a director’s future career prospects, to say the least. Although they won’t always apply, as not every instance of compulsory liquidation is due to director misconduct or mismanagement, it is simply not a risk worth taking, especially if you have alternative options. Rather than allow your company to be placed into compulsory liquidation, you should take action swiftly if your company is in financial trouble. Contact a licensed insolvency practitioner for help to ensure you and your company are spared this unpleasant form of liquidation.
Whatever route you take, Clarke Bell is here to help
If you have decided that closing your company is the better option than keeping it dormant, Clarke Bell can help.
Whether you wish to close the company through an MVL or a CVL, our team of friendly experts is here to guide you and get the best possible outcome. Get in touch today and see how we can help.