Are you thinking about taking a break? Sometimes contractors need to close their limited company – whether for a short period of time or indefinitely. If this is the case, there are a few different options available. While there’s plenty of advice around how to start a limited company, understanding what’s involved in limited company closure isn’t always simple.
We’ve broken down the options available to you depending on whether your company is solvent and insolvent.
Solvent or insolvent: what’s the difference?
A solvent company is one which can pay its liabilities and has no threats of legal action from creditors. On the other hand, 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 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.
In order 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 2 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. It is therefore important that all of the assets, including cash, have been transferred to the ownership of the shareholders before filing the form DS01.
Is dissolution the right route 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 which 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 3 months.
- Changed the company name in the last 3 months.
- Not been threatened with insolvency by creditors.
Members’ Voluntary Liquidation (MVL)
Members’ Voluntary Liquidation 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?
Limited company closure via 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 is no longer needed.
For example, limited company directors who are 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 you make 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 of time 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.
Closing your company if it’s insolvent
There are three tests to determine whether your company is insolvent:
- The cashflow 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, then 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. In order for your company to be closed via CVL, there must be a company director appointed.
Before the company is closed, a meeting must be proposed by the director 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 2 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 simple, and there are a few other things you will need to consider:
Deregistering for VAT
If you’re VAT registered, you will need to complete a VAT form 7 to inform HMRC of your decision to deregister your company.
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, it’s likely that some of the equipment you purchased is owned by your company. 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?
If your company has reached the end of its life, closing it doesn’t have to be hard thanks to our insolvency services. To find out more about the services we offer, call us on 01442 275 789 or get in touch using the form below:
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