Should I Close My Company Or Leave It Dormant?

April 4, 2024 / Business Insolvency

For some directors, it can be advantageous to make their company dormant. Doing so greatly reduces the cost of running the company and frees up time for directors to use elsewhere. However, despite the advantages of making a company dormant, it is not a permanent solution. Sooner or later, directors will have to make a decision; either close the company, or leave it dormant for reopening later. Both options have their pros and cons.

In this article, Clarke Bell discusses what it means to make a company dormant, the pros and cons of doing so, and whether you would be better served closing it instead.

What does it mean to make a company dormant?

In order for a company to be considered dormant, it must not make any “significant accounting transactions” during a given accounting period, but remain on the Register of Companies. A significant accounting transaction refers to anything that a company would ordinarily need to keep a record of, whether it be the purchase of a piece of equipment or the sale of goods or services. Once in this state, directors may largely leave the company to its own devices.

What does it mean to close a company?

Closing a company is a more final approach. Unlike leaving a company dormant, closing a company is to draw a line under it, permanently closing its doors and tying up any loose ends.

If the company is solvent (i.e. it has no debts that it cannot pay back) then it would be concerned with extracting the money from the company and paying it to the owners of the company. If the company is insolvent (i.e. it cannot pay back the debts it owes) then it would prioritise paying back its creditors, as far as it possibly can.

Due to the difference between the two different positions a company is in, the way of closing them down differs.

Pros and cons of leaving a company dormant

Making your company dormant and leaving it in this state can be advantageous, especially if your company is losing money. A dormant company is cheap to maintain, with far fewer administrative costs and potentially no operational costs. Directors will also free up time that could be put to better use, either in the form of a more profitable endeavour or taking much-needed time off. This time could also be used to formulate an effective response to the company’s financial issues. Directors may take as long as they need to achieve this goal, as there is no time limit on how long a company can be left dormant.

While there are several key advantages to leaving a company dormant, it isn’t without its flaws. Most notably, there is still a cost to leave a company dormant. Though it is much cheaper than running a company as usual, dormant companies do require administrative costs, both in terms of time and money. For example, directors must still file their dormant company’s accounts annually, along with submitting a Confirmation Statement to Companies House. Alongside this, directors will still need to pay for any utilities, property taxes, and any other applicable costs.

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Pros and cons of closing a company

Closing a company can be a good option whether your company is enjoying success or facing a spate of financial problems. Directors of a profitable company may choose to close to retire or pursue other ventures, and can extract retained profits using certain methods of closing. Alternatively, directors of unprofitable companies may wish to close to avoid the problem from escalating, preventing their companies from accruing more debt. By utilising certain insolvency procedures, directors can extract value from their ailing company to repay debts. In doing so, obligations to creditors will be upheld. Closing a company allows directors to draw a line under their company, removes administrative duties, and can often be much cheaper than staying the course.

Although closing a company has its advantages, it isn’t without downsides. Closing a company to extract profits can have serious tax implications, ones that must be navigated carefully to avoid any unexpected penalties. Similarly, failing to close a company appropriately can cause additional problems, such as unpaid creditors restoring the company and mounting a legal case against you. Lastly, reversing the closure of a company can be quite difficult if you change your mind after it has been closed.

How can I close my company?

There are several methods of closing a company, with the best solution depending on your company’s circumstances and needs.

Three common methods for a director to close their company are: Members’ Voluntary Liquidation or dissolution (for solvent companies), and Creditors Voluntary Liquidation for (insolvent companies).

Closing using Members’ Voluntary Liquidation

Members’ Voluntary Liquidation (MVL) is typically used by companies with substantial reserves of retained profits – normally above £25,000. Such companies can take advantage of the substantial tax benefits afforded by an MVL.

The tax advantages will usually more than cover the cost of the procedure. To carry out the MVL procedure, directors will appoint a licensed insolvency practitioner (like Clarke Bell) to the role of liquidator. Different insolvency practitioners will charge a different fee for an MVL, so it is worth making sure that you are not paying more than you need to.

The assets will be distributed amongst the company’s shareholders. Once the distributions have been made, the company will be wound up and removed from the register at Companies House. At this point, it will be considered formally closed.

Closing using company dissolution

Company dissolution is another procedure aimed at solvent companies. It is ideal for smaller solvent companies – normally with assets below about £25,000. To begin the procedure, directors must submit a DS01 form – costing either £10 in paper format, or £8 if done through the online portal. Directors must also pay to post a notice in their local Gazette, giving related parties a chance to oppose the dissolution, and cover any costs of removing assets from the company. Once the company is dissolved, it will be removed from the register at Companies House.

If you choose this way to close your company, you will not need to appoint licensed insolvency practitioner. If you do want some help, your accountant will normally be able to help you.

Closing using Creditors’ Voluntary Liquidation

Creditors’ Voluntary Liquidation (CVL) is a method of closing available to insolvent companies. It allows directors to prevent their company’s situation from worsening, giving them an opportunity to repay as many creditors as possible and to uphold their obligations to creditors, while also affording some legal benefits. The directors will need to appoint a licensed insolvency practitioner (like Clarke Bell) to the role of liquidator. Once in this role, the liquidator will assume control over the company, allowing them to quickly dispose of assets, distribute the proceeds to creditors, and wind up the company. Once all distributions have been made, the company will be closed.

Again, different insolvency practitioners will charge a different fee for an CVL. So, it is worth making sure that you are not paying more than you need to.

Clarke Bell can help

Making the decision to close a company or leave it dormant can be difficult. Both options have their pros and cons which must be weighed against your company’s specific circumstances. However, in some situations liquidating the company is absolutely the right thing to do. In such cases, Clarke Bell can be there to help you.

We have more than 29 years of experience in helping directors to close their company with the liquidation process – either with a CVL or an MVL.

Our team of experts will be on hand to help you discuss your company’s situation and determine the best solution available to you. If you choose to liquidate your company, our fees are affordable and we will be there to help you throughout the process.

Contact us today for your free, no-obligation advice to find out the best option for you to take.