Limited Company Closure
Are you thinking about taking a break? Sometimes contractors need to close their limited company, whether for a short period or indefinitely. If this is the case, there are a few different options available. While there’s plenty of advice on starting a limited company, understanding what’s involved in limited company closure isn’t always straightforward.
We’ve broken down the options available to you depending on whether your company is solvent or insolvent.
What is a solvent company?
A solvent company is one that can pay its liabilities and has no threats of legal action from creditors.
Closing your company if it’s solvent
If you want to close down a limited company while its solvent (it has enough assets to discharge its liabilities), then there are two options available to you:
Dissolution (striking off)
Dissolution is an option only if the capital gain released is less than £25,000. Before you strike off your limited company, you must follow the correct process. This involves:
- Telling any interested parties and HMRC of your plans to strike off your limited company.
- Settling any outstanding debts and dealing with the sale or transfer of ownership of business assets.
- Preparing cessation accounts and filing your final tax returns
- Dealing with your employees according to the rules.
To dissolve a company, you must submit a DS01 form to strike off your company, which needs to be signed by all directors and will be sent to Companies House. You must also send copies to shareholders, creditors, and employees within a week of submitting this form. If no objectives have been made, your company will be dissolved within two months of submitting this information. The cost of striking off is £10, and this payment cannot come from the company.
When you dissolve a company, you will be striking it off the register in Companies House, and it will cease to exist. After your company has been struck off, you cannot trade or carry out any business activities through that limited company.
Any assets that are still held by the company at the point it is struck off will become the property of the crown. Therefore, it is important that all of the assets, including cash, have been transferred to the ownership of the shareholders before filing the form DS01.
If you appoint an accountant, they can oversee all statutory filing for your limited company, including necessary paperwork within the deadlines.
Is dissolution right for my company?
Dissolution is suitable if you have decided that you’re no longer interested in trading through your limited company or you opened it for a specific set of purposes that have now been fulfilled. If you have no intention of trading through this company and there is a cash surplus, striking off is often the easiest thing to do.
In order for you to strike off your company, you must not have done any of the following:
- Traded or sold stock for three months
- Changed the company name in the last three months
- Not been threatened with insolvency by creditors
Members' Voluntary Liquidation (MVL)
Members' Voluntary Liquidation (MVL) is the most tax-efficient method for most directors, as shareholders can obtain the value of the company instead of being charged income tax and capital gains tax.
If you apply for Members' Voluntary Liquidation, you will need to complete the following steps:
- The majority of directors (75%) must sign a declaration of solvency
- Shareholders must pass a resolution for voluntary winding up
- The resolution must be published in The Gazette within 14 days
- An authorised insolvency practitioner must be appointed as a liquidator to take charge of winding up the company. Once this liquidator has been appointed, they will take charge of the limited company
- Within 15 days of passing the resolution, you must inform Companies House of this decision
Is Members' Voluntary Liquidation right for my company?
Members' Voluntary Liquidation (sometimes known as solvent liquidation) is appropriate if your business is able to pay its debts and financial obligations. This is often seen as the most favourable choice if the funds held by the company exceed £25,000 and is no longer needed.
For example, limited company directors looking to retire or whose company is no longer running tax-efficiently could choose MVL. This method is sometimes seen as more tedious, but many directors believe that this is offset by the tax-saving advantages available.
A limited company is classed as dormant when it carries out no business activities or hasn’t received income for a period of time.
Before making your company dormant, you must ensure that Corporation Tax is paid in full. You will still need to submit an annual confirmation statement, annual accounts, and dormancy statements to HMRC.
Is dormancy right for my company?
Making a limited company dormant is ideal if you only intend to step away for a short period before you return. Some new limited company directors also set up their business before they are ready to begin trading. On the other hand, there is still a certain level of administrative responsibilities involved.
To learn more, take a look at our guide to company dormancy.
What is an insolvent company?
If your company is insolvent, it may have insufficient funds, have more liabilities than it has in assets, or be facing pressure from creditors.
Closing your company if it’s insolvent
There are three tests to determine whether your company is insolvent:
- The cash flow test – can your company pay its bills?
- The balance sheet test – does the company’s assets exceed liabilities?
- The legal action test – has any legal action been taken out against your company in excess of £750?
In short, if the company’s liabilities exceed its assets, it’s more than likely it will be considered insolvent.
Creditors' Voluntary Liquidation (CVL)
A Creditors' Voluntary Liquidation must be appointed to close your company if it can’t pay bills or its liabilities exceed its assets. For your company to be closed via CVL, a company director must be appointed.
Before the company is closed, the director must propose in which all shareholders are expected to be present. This is known as a 'winding-up resolution' and must be agreed upon by 75% of these shareholders. Once the decision has been made, the resolution should be sent to Companies House within 15 days and posted on The Gazette within two weeks. An authorised liquidator also needs to be appointed.
Voluntary liquidation or winding up your company can be done by applying to Companies House.
What are my responsibilities when I close my limited company?
Limited company closure is not always straightforward, and there are a few other things you will need to consider:
Deregistering for VAT
If you don’t inform HMRC that you have ceased trading, it’s possible that you may still be served reminders to pay your company’s Corporation Tax.
Capital gains responsibilities
If you have been working through your own limited company, your company likely owns some of the equipment you purchased. If you close your company, you will need to sell these assets or transfer the ownership to yourself, accounting for the sale at market value. You will need to account for the capital gain released to you on the closure of your company on your self-assessment tax return.
Thinking about closing your limited company?
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