Closing a limited company: the options
Posted on 8th August 2019
Making the decision to close your limited company isn’t one to take lightly, and there can be a multitude of reasons why you may have to consider making that choice. It may be time to retire, or perhaps a permanent job opportunity has popped up that you simply can’t turn down. Sometimes, when a company is struggling to make a profit, you may feel the only option is to close it down.
Depending on your circumstances, there are several methods in which you can take to close your limited company, and there are requirements that you must follow in the run up to doing so.
Voluntary liquidation is when all the company’s assets are sold and the revenue is distributed. The company can then be struck off the register and, finally, dissolved. Liquidation should only be considered as a last resort after all other avenues have been explored.
There are three types of liquidation, but the same basic procedure applies. First of all, an insolvency practitioner is appointed as the liquidator, who then assesses the company assets. The assets are then liquidated and paid to the creditors in order of priority. Shareholders then receive any surplus funds, and then the limited company can be struck off.
The three types of liquidation:
Member’s voluntary liquidation is when the company is solvent – i.e. its assets exceed its liabilities – and the shareholders wish to extract its profits as a capital distribution. This results in formal liquidation of the company.
Creditor’s voluntary liquidation is when an insolvent company – i.e. its liabilities exceeds its assets – are dissolved and the company’s assets are distributed to its creditors as a way of paying off unsecured debts.
Compulsory liquidation is when a creditor pays for a court order to force a company into closure. An Official Receiver or appointed Insolvency Practitioner handles the process.
Striking off the company
Striking your limited company off the companies register can be done when it is no longer required. You should bear in mind that this is not an alternative to insolvency – and even if it is struck off, creditors are able to request that the company is restored to the register.
When preparing to have your company struck off, the first thing to do is to set a date on which the company will be closed. Once you’ve done this, all the company’s outstanding invoices must be settled. Next, your accountant will prepare your final company accounts. They will then calculate and pay the final amount of corporation tax, and then empty and close the company bank accounts. Transfer any domain names the company owns, if applicable. Finally, if appropriate for your company, de-register for VAT and PAYE via the gov.uk website.
Three months after the date the company stops trading, you can apply to have the company struck off the register by filling in the online DS01 form on the Companies House website.
Within seven days of applying to have the company struck off, the director of the limited company must inform any people who are associated with the company. Associated people may include shareholders and members, other directors who have not signed the DS01 form, employees, creditors and guarantors, banks, suppliers, landlords and tenants, current personal injury claimants, managers or trustees of employee pension fund (if applicable), and of course the DWP (Department of Work and Pensions) and HMRC.
Companies House will send a letter to the company’s registered address to verify that the application is genuine. If no objections are received, Companies House will go ahead.
Dormancy: the temporary option
If you want to cease trading for now, but are not sure whether you will resume company activity in the future, it may be an option to make your company dormant.
A dormant company does not pay corporation tax because it is classed as having no significant accounting transactions. If the company undertakes any activity that isn’t permitted while it is dormant, it may be liable for additional tax.
Directors can make their company dormant when taking sabbatical leave, suffering a prolonged illness or making a temporary move abroad, amongst other reasons. Essentially, it’s the most sensible option when you’re not completely certain that you will be ceasing to trade permanently.
There are no time limits for how long a company is permitted to remain dormant, and to start trading again after a period of dormancy, all you need to do is inform HMRC that your company has started trading again within three months of doing so. Companies House should be contacted as well, and you can do this within nine months of the company’s year-end date. Corporation tax should be settled in this same period, with company tax returns needing to be filed within twelve months of its year-end date.
Which route is right for me?
If you have decided that making your company dormant is not the right route for you, and that you are absolutely certain you will not be trading again any time soon, you should consider whether you are going to strike off the company, or enter it into member’s voluntary liquidation – and both have their pros and cons.
Member’s voluntary liquidation is the more expensive option upfront, but it can work out more cost-effective overall if the company has over £25,000 worth of assets as they can be distributed and treated as capital gain, – but can take many months for the full process.
Striking the company off is cheaper upfront and takes a maximum of three months so is much quicker – but if the company has more than £25,000 worth of distributable assets these cannot be treated as capital gain.
With the Member's Voluntary Liquidation you may be able to claim Entrepreneur's Relief (watch out for an upcoming blog on this!) to reduce your tax rate to just 10%!
If a company has outstanding liabilities, creditors may object to it being struck off. With member’s voluntary liquidation, if creditors disagree with the decision of the licensed liquidator, they have 21 days in which to apply to the court to appeal it. Once a company goes into liquidation, however, this decision is final and cannot be reversed.
If your company is having financial worries, it is always better to speak to your creditors first and attempt to arrange a payment plan for any debts. We can help you come up with a feasible strategy for this, and will also be able to help put together a proposal for creditors if you need one.
Nicola J Sorrell
- Effective Accounting
Founder | Xero Champion | IR35 Expert
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