Should You Close a Company or Leave It Dormant?

November 9, 2021 / Business Tips

Many directors will be faced with the decision of whether to close their limited company or leave it dormant.

Closing a limited company is a big decision that directors must take careful consideration over, and some may instead prefer to leave the company dormant if they feel the company could be revived in the future.

To help directors make the right decision for their circumstances, Clarke Bell has put together this guide taking a close look at closing a company vs leaving it dormant.

Option 1: Leave a company dormant

A dormant company is one that doesn’t have ‘significant accounting transactions,’ meaning it is inactive and isn’t trading or bringing in income from any activities.

A dormant company is still listed on the Companies House Register, although it is inactive.

It might be the case that you have set up a limited company that has not yet begun to trade, or the company s previously traded and decided to pause trading activities. In either case the company is considered dormant if it ceases to trade but does not liquidate.

Although the company is inactive, it’s important to note that the company must be registered as dormant with HMRC so as to avoid filing full accounts.

There are several reasons why you might choose to keep a company dormant but usually they revolve around a belief that you might use the company in the future. Perhaps the company will start to trade again after a hiatus, or you have plans for the company but as yet do not know what it will do in the future.

Either way you can leave a company dormant indefinitely if you choose to.

Option 2: Closing the company

Rather than leaving the company dormant, the other option is to close the company.

Just as it sounds, this is when the director decides to liquidate or strike off the business meaning it will cease to trade, operate or even exist as an entity.

There are several different ways to close a company, the type of which depends on your company’s finances.

Also Read: How To Close a Dormant Company

Dissolving a company

A director can opt to dissolve or “strike off” the company.

In order to do so, the company must not have traded or sold stock in the last 3 months, it must not have changed its name for the last 3 months and it must not be insolvent, have any legal action being threatened against it, or any agreements in place with creditors.

To dissolve a company, the director needs to complete a DS01 form which must be returned to Companies House. This is the simplest form of company close and is ideal for a dormant company that has no debts or assets.

Liquidating a company

In the event that your company has assets but is dormant or that it is a trading entity, you cannot simply strike off the company.

In this event you must follow a formal liquidation process. The process that you must go through will depend on whether your business is solvent (has more assets than liabilities) or insolvent (cash flow issues).

There are two main types of liquidation to consider – a Creditors’ Voluntary Liquidation (CVL) or a Members’ Voluntary Liquidation (MVL).

Creditors’ Voluntary Liquidation

The first option, a Creditors’ Voluntary Liquidation, is a route open to insolvent companies.

When a company can’t pay its debts, the director can voluntarily decide to close it through a CVL.

This is a voluntary liquidation process that will only proceed if 75% of company shareholders agree to go ahead with the required resolution needed to wind the company up.

A CVL results in the company being closed, meaning it is a good way for a director of a company with debts to take control of the situation and close their company before things get any worse.

The process is initiated by the director that must contact a licensed Insolvency Practitioner at the first signs of financial trouble. The Insolvency Practitioner will ensure that the liquidation process is carried out in the correct, legal manner.

They will also gather the necessary information needed for the liquidation process to proceed, which will include a list of creditors as well as company accounts.

Before the company can be liquidated, it will need to stop trading.

There are many benefits to closing a company through a CVL.

After all, it lets directors of insolvent companies close their business in the correct way and meet their duties as a director to creditors. This means that a director can safeguard their reputation, leaving more options open to them in the future.

Find out more about how to close a limited company with debts in this handy guide.

Members’ Voluntary Liquidation

The second option, a Members’ Voluntary Liquidation, is a route open to solvent companies.

To be eligible to enter into an MVL, the company must be solvent and hold assets of £25,000 or over.

Again, an MVL is a completely voluntary liquidation process that is initiated by the director and shareholders when the time is right.

Before entering into an MVL, the company must be able to prove that it is solvent, it can pay its creditors and taxes and that it can fulfil any contractual obligations it might have.

Arguably the main benefit to closing a company through an MVL is that it is a route that allows the director to close the company in a tax-efficient way.

By closing a company in this way, the funds taken out of the company will be subject to Capital Gains Tax which is just 10%. This can save directors a lot on their tax bill as it is a significantly lower cut than Income Tax which is 18% at the basic level or 28% at the higher level.

Furthermore, there are additional advantages for companies that can benefit from Business Asset Disposal Relief.

This allows the director to sell the company, or just part of it, and pay 10% in Capital Gains Tax on profits.

Closing a company or leaving it dormant: Let Clarke Bell help

After reading our handy guide on should you close a company or leave it dormant, we hope you have a better idea of the best route for you. However, if you need further advice, Clarke Bell is here to help.

Our team of professionals will work closely with you to find the best way forward, whether that is to leave the company dormant, close it through a CVL or through an MVL.

We have 28 years of experience in which time we’ve helped thousands of companies across the UK. If you’d like to find out more, or for some free initial advice, simply get in touch with the Clarke Bell team today.