closing comapany

Expert Advice on How to Close a Company

Opting to close a company is not a decision many directors take lightly, even if it is a solvent company without any debts. There are many reasons why a company may be closing including retirement, restructuring or going back to being a sole trader. If it’s a solvent company or if insolvent, the options are either a business recovery situation or liquidation.

Once the decision has been made, there are a number of important aspects to consider. These include what course of action to follow is best suited to the company, directors, shareholders, staff and creditors to how the process is going to work, as well as any matters that may need resolving prior to appointing an insolvency practitioner or liquidator.

Whether it’s a solvent or insolvent company, before progressing make sure any loose ends are dealt with. For example, settle any outstanding bills and if that’s not possible, collect any money that is owed to the company. If the company is VAT registered, inform HMRC of the intention to deregister the company and complete a final VAT return. The same applies to corporation tax and any PAYE scheme that is being operated by the company.

Solvent or insolvent?

There are different options for closing a solvent company and winding up an insolvent company. So, initially, decide whether the company is solvent or insolvent and for this, there are two tests to carry out:

  • The cash flow test – can the company pay its financial commitments when they are due?
  • The balance sheet test – do the company’s liabilities outweigh its assets?

Steps to closing a solvent company

If the company doesn’t have any debts, there are a couple of options to closing the company – dissolution or a Members Voluntary Liquidation (MVL). Let’s look at both options. Dissolving a company is an easier, cost-effective way of closing a solvent limited company but if there are profits of £25,000 or more, the option is an MVL.

Step 1 – whether it’s a dissolution or an MVL, ensure the company ceases trading three months prior to closing down and that any money owed to creditors, suppliers, shareholders and directors is paid. Notify HMRC to cancel VAT registration as well as corporation tax and any PAYE scheme. Prepare and submit the company’s draft final accounts and VAT return.

Step 2 – issue a formal notice to staff and calculate their final payroll. Whilst the directors can resign at this point, at least one must remain to handle the company closure and/or work with the insolvency practitioner.

Step 3 – place an advert in The Gazette of the intended closure of the company to alert any creditors or interested parties.

Step 4 – sell or transfer any company assets and distribute any remaining funds to the directors. Pay staff their final payroll and any corporation tax to HMRC. Close all bank accounts because when the company is struck off by Companies House, any accounts left open are frozen and any monies remaining go to the Crown. Once the company has been removed from the register, it no longer exists.

Closing an insolvent company

The steps to closing a company with debts are similar to closing a solvent company. There are two main options for an insolvent company; one is voluntary and the other is compulsory. Creditors Voluntary Liquidation (CVL) is where the company’s directors, and shareholders where applicable, voluntarily decide to liquidate the company. This could be because they can no longer meet their financial commitments, pay their creditors or their debts, and decide to close the company, realising their assets to raise funds to pay the resultant fees and the debts.

Usually, an insolvent company has already been in contact with a licensed insolvency practitioner who will work with you in calling a meeting with all the directors and shareholders of the company before entering into a CVL. 75% of the board has to agree to the CVL and once the decision has been made, the insolvency practitioner is appointed as liquidator of the company.

If the company is closing due to compulsory liquidation, it is usually because a creditor that is owed more than £750 has applied to the court for a winding up petition. If the court approves the petition, the company is forced to close and a liquidator is appointed by the court.

The liquidator takes control of the company, working with the directors, to liaise with creditors, HMRC and any other parties who have a claim on the company. They place the advert in The Gazette as well as arranging for the company’s assets to be valued and sold at market value, subsequently distributing any funds raised between the creditors in a priority order specified by the Insolvency Act 1986. As long as the directors have not been party to misconduct or wrongful trading, they have the option of buying back any of the assets as long as it is at market value. Once the process has been completed, the liquidator will apply to Companies House to remove the company from the register.

With compulsory liquidation, the directors and shareholders of the company will be subject to investigation by the liquidator for any potential unlawful or fraudulent trading, or misconduct, prior to the compulsory liquidation being granted.

Turning a limited company into a dormant company

If a limited company is solvent but not trading or is inactive, notify HMRC that instead of closing the company down, it will be made ‘dormant’. This allows the owner or director to work as a sole trader outside of the limited company. Tax returns will still have to be filed as nil returns. When returning back to a limited company, the self-assessment becomes more complicated.

Whilst this isn’t an option for every company, for a solvent company that isn’t making much money for whatever reason, which is happening much more during the coronavirus pandemic, it is a viable option to continue to trade. The general rule of thumb is that if the company’s annual profits are lower than approximately £30,000, working as a sole trader is a better option, if only for the fact that there is less accounting and paperwork to deal with.

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