What Is a Dormant Company?

October 22, 2021 / Business Insolvency

Closing a limited company is a significant decision to make and requires serious consideration.

If you are unsure about whether closing down your company is the best move, it might be better to leave it dormant.

In this guide, Clarke Bell explains what a dormant company is and why a director might leave their company dormant, so you can decide what will be best for you.

What is a dormant company?

A dormant company is one that is inactive and doesn’t have any ‘significant accounting transactions.’ In other words, it is a company that is not trading and doesn’t have any other income, such as from investments.

Although the company is inactive, it still remains on the Companies House register.

If you have set up your limited company and have not yet traded then the company is classified as dormant. If you have previously traded and want to pause company activities, you must register the company as dormant with HMRC.

There are advantages and disadvantages to having a dormant company.

Firstly, we will look at the advantages:

Get in touch to see how we can help

Oops! We could not locate your form.

What are the advantages of leaving a company dormant?

There are several benefits to leaving a company dormant.

Firstly, this is a good option for directors that need to take time off from running their company. Amongst other reasons, this might be because the director falls ill, needs to take a well-earned break or has to temporarily move abroad.

This allows the director to take a break from the business but return to it at a time that is convenient to them.

This is also handy for directors that wish to set up a company that they only intend to use in the future. It might be the case that you want to set the company up so it is ready to go when you are, but you have other things to sort out before you start trading.

This also safeguards the company name you have chosen, ensuring that no one else can incorporate a business in the same name.

Another benefit is that there is no limit to the amount of time that you can keep the company dormant. So, if you are unsure how much time you need to take away from the business, there is no time pressure.

This is also an easier and cheaper process over closing down the company altogether.

What are the disadvantages of leaving a company dormant?

Although there are several benefits to having a dormant company, there are also drawbacks to this option.

For example, the director of a dormant company is still obliged to carry out certain administrative tasks such as filing dormant accounts as well as submitting a Confirmation Statement to Companies House annually.

Therefore, although your company is no longer trading, you will still be obliged to carry out these tasks.

After reading about the advantages and disadvantages of leaving a company dormant, if you have decided that this is not the right option for you, you will need to know about the alternative, namely closing down the limited company.

Closing a limited company

If you have decided that you instead want to permanently stop trading and be struck off the Companies House Register, it will instead be better to close the limited company.

If you have reached this decision, the first thing you will need to establish is whether the company is solvent or insolvent, as this will determine the right way to close the limited company.

First, let’s look at how to close a solvent company.

Apply to have the company struck off the Companies House Register

The first option for closing a limited company is to apply to have it dissolved and struck off the Companies House Register.

To be eligible for this route the company must meet the following criteria:

  • It must not have traded or sold any stock in the previous 3 months
  • It must not have changed names in the last 3 months
  • It must not be insolvent
  • It must not be threatened with liquidation
  • It must not have any agreements with creditors like a Company Voluntary Arrangement (CVA)

To close the company in this way the director must fill out the DS01 form and return this to Companies House, which will cost just £10.

The other option for solvent companies is to put the company into Members’ Voluntary Liquidation (MVL.)

Close the company in a tax-efficient way with a Members’ Voluntary Liquidation

An MVL is an option open only to solvent companies that have assets over £25,000.

This is a great option for directors who are looking to close their company in a tax-efficient way. By closing a company through an MVL, funds taken out of the business are subject to Capital Gains Tax rather than Income Tax, with further benefits to companies that qualify for Business Asset Disposal Relief.

This means directors can save a small fortune on their tax bill when closing a company in this way.

To find out more about this route, check out our complete guide to Members’ Voluntary Liquidation.

However, if the company is insolvent, different options will be available.

Closing an insolvent company through Creditors’ Voluntary Liquidation (CVL)

Directors can close their insolvent company through Creditors’ Voluntary Liquidation.

This is a good option for companies that are in debt and owe money to creditors but want to take control of the situation and close the company before the situation gets worse.

Entering into a CVL will mean that the company will avoid being forced into compulsory liquidation which is the most serious form of liquidation.

To find out more about CVL check out our handy guide.

Whatever route you take, Clarke Bell is here to help 

If you have decided that closing your company is the better option over keeping it dormant, Clarke Bell can help.

Whether you wish to close the company through an MVL or a CVL, our team of friendly experts is here to guide you and get the best possible outcome. Get in touch today and see how we can help.