How to close down a limited company – 4 options

Thinking of closing your limited company?

There’s a lot to consider.

For one, how you choose to close your company could have a big impact on your tax bill. And, depending on your business’ financial health, there are also legal implications to take into account.

In this guide, we take a deep dive into the process of closing a company.

Read on to find out:

• The four main types of procedures and when to use them
• How to close your company as tax-efficiently as possible
• What you need to do once the process is complete

Why are you closing your limited company?

How you go about closing your limited company depends on its financial situation.

If your company is solvent — that is, there’s enough money to pay suppliers, bills, and other debts — you can either strike it off or start a members’ voluntary liquidation.

If the company is insolvent — that is, business is going so badly the company can no longer afford to pay its debts — you also have two options:

• Put it into administration
• Start a creditors’ voluntary liquidation

It’s worth noting that, while closing a solvent company is usually a personal decision, you could get in trouble with the law if you don’t take action as soon as you realise your company is at risk of insolvency.

We’ll take a more in-depth look at the reasons for and possible consequences of continuing to trade while insolvent in a few paragraphs.

How to close a solvent company

So your company has a healthy bank balance but you’ve decided to call it a day, for example because you’re retiring, working a full-time job, or starting a new venture.

If there’s money left over after you pay off your debts, HMRC will want a cut. So the main thing to consider when deciding how to close your solvent company is your potential tax bill.

Let’s have a look at your options and their tax implications.

Striking off

To strike off a company, it must have been inactive for at least three months. You must also:

• Tell HMRC, creditors, employees, shareholders, and other company directors you’re planning to strike it off
• Pay your outstanding debts. If you have employees, you’ll have to give them redundancy pay. You’ll also need to pay corporation tax on any income you’ve earned during the current financial year.
• File form DS01 with Companies’ House and pay the fee. This is £8 if you file online and £10 if you send in the form by post

The biggest advantage of striking off is that it’s quick, simple, and cheap.

The catch is that it won’t be tax-efficient if your company’s retained profits — that is, the money that’s left after you pay your debts — are more than £25,000. This is because, in strike-offs, HMRC caps capital distributions — amounts that don’t count as income for tax purposes — at £25,000.

The difference to your tax bill can be eye-watering.

If your retained profits are £25,000, you’ll pay capital gains tax at:

• 10% if you pay income tax at the basic rate
• 20% if you pay income tax at the higher rate
• 10% if you pay income tax at the higher rate but qualify for entrepreneur’s relief (BADR).

That means the most you might have to pay the taxman would be £5,000.

By contrast, if you’re over the threshold, you’ll need to add your retained profits to your other income and pay income tax or dividend tax — depending on whether you take your retained profits as a salary or dividend — at your highest rate.

The highest dividend tax rate is 39.35%. And the highest income tax rate is a whopping 45%, plus employer’s and employee’s national insurance contributions on top.

Voluntary members’ liquidation

A voluntary members’ liquidation takes longer and is more expensive than striking off your company. But if you have significant retained profits, it’s worth it for the tax savings.

To start the process, you’ll need to:

• Make a declaration of solvency. This is a statement that the company has enough money to pay its debts, countersigned by a solicitor.
• Pass a shareholder’s resolution formalising your decision to close the company
• Appoint a liquidator. This is usually an accountant or insolvency practitioner.

The liquidator will pay off the company’s debts, wrap up any outstanding issues — contracts that are yet to be fulfilled, for instance — and get the company struck off from the Companies’ House register.

A members’ voluntary liquidation can take up to 12 months to complete, and the liquidator’s fees could run into five figures, depending on how complicated the company’s affairs are.

The flipside is that there’s no cap on capital distributions. And that means you pay capital gains tax on all the money you receive from the company at the following rates;

• 10% if you pay income tax at the basic rate
• 20% if you pay income tax at the higher rate
• 10% if you pay income tax at the higher rate but qualify for entrepreneur’s relief

How to close an insolvent company

As sad as it is to shutter a company you’ve worked hard to build, this is usually the smart move if you’re in financial trouble.

When a company is insolvent, the directors owe a legal duty to the creditors, and their interests will come before those of the shareholders.

Your creditors can make you pay what the company owes them out of your own pocket if they can prove you engaged in:

Wrongful trading – You could be found guilty of this if you continue doing business even though there’s no reasonable prospect the company’s financial situation will ever improve

Fraudulent trading – This is where you continue trading even though you know the company is insolvent.

The key difference between fraudulent and wrongful trading is intent. In wrongful trading, you hope things might improve, even though this is unlikely. In fraudulent trading, you intentionally deceive your customers or creditors, for example by taking a deposit for a service you aren’t going to deliver.

As a result, aside from being on the hook for your creditors’ losses, you also risk criminal penalties.

Malfeasance – This is illegal or unethical behaviour. For example, you sell your company car to a family member or friend for much less than it’s worth. Or take a large salary or dividend even though the company can’t afford it.

You may also be disqualified from being a company director or otherwise involved in running a company for up to 15 years.

Needless to say, when a company is insolvent it’s unlikely there will be money left once the process is complete. So the main thing to consider when deciding which process to use to close your company should be the seriousness of the financial situation.

Let’s have a look at your options.

Administration

This is the business equivalent of putting your company in intensive care. Instead of closing your company straight away, you appoint an insolvency practitioner to evaluate the situation and decide the best way forward.

Depending on what they find, the administrator may:

• Try and save the business by entering into an agreement with your creditors. This is called a Company Voluntary Arrangement, and it allows the company to pay off its debts while continuing to trade
• Sell your business to raise enough money to pay off its debts
• Start a creditors’ voluntary liquidation

Creditors’ voluntary liquidation

Here, you — or the administrator, if you’ve placed the company in administration — call a shareholders’ meeting and ask permission to close down the company.

If enough shareholders agree — the law says the owners of 75% of the company’s shares must vote in favour — you appoint a liquidator who’ll wrap up the company’s affairs and close it down.

If the company is insolvent but the shareholders vote against closing the company, your creditors can ask the court to do it. This is called compulsory liquidation.

What happens after you close a company?

Closing your company has consequences, regardless of its solvency. In particular, you’ll need to fulfil certain obligations, and you risk getting into trouble with the law — and the taxman — if you don’t.

If you close your company using the voluntary members’ liquidation procedure, you can’t start a similar business for at least two years, or you’ll have to pay income tax on your capital distribution.

This is because HMRC wants to prevent businesses from using this procedure simply to avoid tax.

Similarly, if you closed your company because it was insolvent, you can’t be involved in another company that has the same or a similar name for at least five years.

Here, the purpose is to prevent phoenixism, where failed businesses close to avoid paying their debts but continue trading through an identical new company like nothing happened.

You’ll also need to keep bank statements, invoices, and other records for 7 years after your company closes.

The third option: letting your company go dormant

If closing your company feels too permanent, you could let it go dormant. This simply means your company is inactive. In other words, it’s on the Companies’ House register but isn’t trading.

The benefit of this is that, if you change your mind — for example because you decide retirement or full-time employment aren’t for you — you can reactivate the company instead of having to start from scratch.

You can let your company go dormant at any time, even if you’ve just registered it. You can also leave it dormant for as long as you like. The important thing is that you settle all the company’s debts before you do so. You’ll also still have to file your accounts and confirmation statement with Companies’ House.

Read more in our dormant limited company guide.

Wrapping up

As with any other aspect of running a limited company, how you go about closing it requires careful thought.

There are four key things to consider:

• Is your company solvent, or insolvent?
• If it’s solvent, how much retained profit does it have?
• If it’s insolvent, might it be possible to turn things round?
• And should you even close the company, or is it worth pressing pause for a while?

It sounds obvious, but it all depends on the company’s financial circumstances and your personal situation.

So, before you take action, be sure to have a chat with your accountant, as they’re best-placed to help you navigate this huge decision.