There are a number of positive reasons to move on from your current business, whether you’ve decided to move onto a new venture, realised you prefer to operate as a sole trader, or reached retirement. Understanding how to close a limited company will help you choose the right option to minimise legal and tax issues.
Your options will vary if the decision has been made voluntarily, or if it’s been imposed for other reasons. And if you’re taking a break from self-employment, then it’s possible to simply let the company go dormant for tax purposes, so you can resume trading at a future date.
Many successful self-employed business people have needed to change direction in their careers. While it may be emotional or painful when a business is closed (also known as ‘dissolved’), it might be the best decision.
Before deciding on a course of action, it’s important to understand whether your company is solvent (able to pay its bills), and to get independent specialist advice from a solicitor or insolvency practitioner. IPSE members can get started by using our tax and legal helplines to get guidance on their options.
Why you may need to close a limited company
There are various reasons why you may need to close a limited company. In many cases it can be a voluntary choice made by one or more founders or directors.
You may decide that the business isn’t profitable or viable enough to continue working on it, or the company structure isn’t the best option from a tax and administrative point of view. Other triggers for closing a company can be retirement, to repay capital to shareholders, or you may not agree with other directors on the vision for the future.
It can also be imposed by Companies House, often for failing to file annual returns or complying with UK laws. Or by a court, if the business hasn’t settled taxes or is subject to legal action by creditors for failing to make payments.
If your business is no longer trading, it doesn’t necessarily have to be dissolved. You can let it become ‘dormant’ for tax, and there’s no time limit on how long this can last.
Your company will remain registered at Companies House, and you’ll still be required to send them your annual accounts and confirmation statement.
To be classed as dormant, the company cannot be trading, carrying on business activity, or receiving income.
This is a good option if you’re entering back into permanent employment for a while. Or if the current economic and market conditions aren’t favourable, but you think your business will become viable again in the future.
If your business is solvent (able to pay its bills), the easiest way to dissolve or close is to apply to be struck off the Companies Register.
To be eligible, your company needs to meet the following requirements;
- has not traded or sold off any stock in the last 3 months
- has not changed names in the last 3 months
- is not threatened with liquidation
- has no agreements with creditors, for example a Company Voluntary Arrangement (CVA)
Before applying, you’ll need to announce your plans to interested parties and HMRC, sending final statutory accounts and a Company Tax Return.
You’ll also need to go through redundancy rules if you employ permanent staff, and ensure business assets are distributed among the shareholders before the company is struck off. Anything left will go to the Crown, including future payments such as any refunds from HMRC.
Access to company bank accounts will be lost when your company is struck off, so you should close them before applying. And deal with any other assets, such as selling or transferring any domain names.
To apply to be stuck off costs £10, and requires you to complete form DS01 and send it to Companies House.
Your request will then be published in The Gazette, which allows objections from individuals, companies, or professional bodies if, for example, you owe them an outstanding debt. If no one objects, then the company will be struck off once two months have passed, with a second notice published in The Gazette. And at that point the company no longer legally exists.
A Members Voluntary Liquidation when solvent
If your business has more than £25,000 in assets, then you could find that a Members Voluntary Liquidation (MVL) is a more tax-efficient option than simply striking off your company. Especially as directors can take advantage of Business Asset Disposable relief to qualify for a lower 10% rate of Capital Gains Tax.
It’s a more complicated process, which requires you to call a general meeting of the shareholders, and pass a special resolution to begin the process of winding up your business. To do this you’ll need to make a declaration of solvency (or ask the Accountant in Bankruptcy for form 4.25 for Scottish companies)
The declaration must be signed by the majority of directors in front of a solicitor or notary public, with a general meeting of shareholders within five weeks to pass a resolution for voluntary winding up.
You’ll then need to appoint an authorised insolvency practitioner as a liquidator, who will then take control of the business, including settling legal disputes, outstanding contracts, payments to creditors, and the final liquidation costs and VAT bills. It’s important to note that they’ll act in the interest of the creditors, not directors.
You also need to advertise the resolution in The Gazette within 14 days. The liquidator will call a general meeting once the winding up process is complete, and their progress report will be sent to Companies House, along with the Return of final meeting form.
Once this is all finalised, the company will be dissolved within approximately three months of the filing date.
If you want to close a company which is in debt and can’t pay the money owed, the main options are going into administration, or a creditor’s voluntary liquidation.
Winding up an insolvent business will involve more regulations and restrictions regarding the financial and legal process, along with the impact on directors. It’s even more important to seek specialist advice when you’re closing a company with outstanding debts, and to ensure you understand the implications if you’re looking to start another business in the future or already have an involvement in other companies.
Entering into administration requires a professional insolvency practitioner to take control of your company and assets, notifying creditors and Companies House that they have been appointed.
During the administration process you’ll be protected from legal action by creditors. The administrator will try to stop the company from being liquidated. If this isn’t achievable, they will try to settle as many debts as possible from the company assets.
The result may be to negotiate a Company Voluntary Arrangement for the business to continue trading, selling your company or assets, or closure if there’s nothing to sell.
A creditors’ voluntary liquidation (CLV) is similar to an MVL, in that you need to call a shareholder meeting, and 75% (by share value) must agree to the decision to pass a ‘winding-up resolution’. Once this is made, you’ll also need to appoint an authorised insolvency practitioner, send the resolution to Companies House within 15 days, and advertise the resolution in The Gazette within 14 days.
The consequences of entering into a CVL include an investigation into the conduct of directors and the history of the company. If there is an issue, this could lead to a more thorough investigation by the Insolvency Service, with the risk of disqualification from management roles for up to 15 years, fines, personal liability or even a prison sentence.
Along with restrictions on re-using the same or similar name, you may also be required to pay a security deposit with HMRC if they believe your new company could fail to pay tax on time.
If your company owes money to creditors, those individuals or organisations can apply to the court to get their debts paid by either issuing a statutory demand or getting a court judgement.
If you receive a statutory demand, you are required to respond within 21 days by either paying the debt, reaching an agreement, putting your company into administration, or applying to liquidate the company yourself. It’s also possible to apply to the court within 21 days to restrain creditors from applying to wind up your company.
You have 14 days to respond to a court judgement, with the additional option of challenging judgement, which can include asking to change the terms, pay in instalments, or cancel it if you don’t actually owe the debt.
In both cases, you should seek specialist advice from a solicitor to ensure you respond appropriately.
Creditors can apply to the court with a ‘winding-up petition’, and if accepted, the court will arrange a date for a hearing. If it’s decided you can’t pay your debts, a winding-up order will be issued, and your company will be put in the control of an officer of the court, known as the official receiver.
If you wish to start trading with a dormant company, you simply need to tell HMRC that you have resumed by registering for Corporation Tax again by signing into your business tax account and following the required steps.
If you’re unable to restore your old business, then it’s important to avoid using the same name, or one which is so similar it suggests an association with the previous company, for any new venture, as this can be seen as a phoenix company.
If you’re considering closing a limited company, it’s important to get the right advice to help you choose the best option for both the business, and your personal circumstances. IPSE members have access to tax and legal helplines which can start the process, along with investigation cover depending on your membership level.
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