Why own a dormant limited company? Two common scenarios for business owners

A dormant company is just a standard limited company that doesn’t trade and has no accounting transactions.

There are two main situations where owning a dormant limited company is beneficial to a business owner.

  • Preserving your limited company, if you are stopping trading for a period of time.
  • Protecting your interests if you are a business operating as a sole trader, or are thinking of becoming self employed.

Dormant companies can also be used to hold an asset, such as a freehold property. However this purpose is of limited relevance to small business owners, so it will not be covered in this guide.

1. Preserving your limited company, if you stop trading for a period of time

One situation where a dormant company may be useful is if you have already been operating as a limited company, but you are stopping trading for a period of time.

For example, you may have been running a successful company but are moving overseas for a few years. In this instance, you might want to keep your company going so you can restart it when you return to the UK.

The main drawback of keeping your company going is that limited companies are required to file full company accounts to Companies House every year. The cost of paying an accountant to produce and submit these accounts can be significant.

By making your limited company dormant, you can avoid much of the cost of maintaining your company. And you won’t need to go through the administrative process of closing down your limited company.

Your accountant will advise you on precisely how to make your company dormant.

2. Use a dormant limited company to protect your sole trader business

A most popular reason for owning a dormant company is to protect your business when you are operating as a sole trader (self employed).

Operating as a sole trader offers small business owners several advantages over the limited company route.

However, if you are a sole trader, unless you have trademarked your business name, there is nothing stopping anybody else from registering the limited company of the same name.

Limiting reputational damage

For example, you may have a consultancy business trading as “First Point Consultants” which you’ve spent many years building up and carving out a great reputation for.

Then one day you find that a new business called “First Point Consultants Ltd” is operating, but it’s developed a poor reputation. There’s a big risk that potential customers might confuse the two businesses and your business could be damaged.

This is an increasingly important factor these days, as more and more potential customers use the internet to find you. If they come across a few bad reviews for “First Point Consultants Ltd” you could miss out on valuable new business.

Protect your business by buying a company and keeping it dormant

Many people buy a company, but keep it in a dormant state. This means that no-one else can buy the name, and you can always make the company active at a later stage. Or, you can simply keep the company dormant for as long as you like.

The formations process is the same whether you form a company for trading, or to keep dormant for possible future use.

Read on to find out what legal obligations you have as a director of a (dormant) limited company.

What is a dormant company?

The rules on what constitutes a dormant company are strict. However, Companies House and HMRC have a slightly different interpretation of the term ‘dormant’. Companies House defines a company as being dormant:

…if it has had no ‘significant accounting transactions’ during the accounting period. A ‘significant accounting transaction’ is one which the company should enter in its accounting records.

The only allowed transactions of a dormant company are:

  • Payment for shares taken by subscribers to the memorandum of association
  • Filing fees paid to the Registrar of Companies.
  • Payment of a civil penalty for late filing of accounts.

HMRC’s definition of a dormant company is

… a company that’s not active, not liable for Corporation Tax or not within the charge to Corporation Tax.

HMRC consider the following examples to be ‘dormant companies’:

  • A new company that hasn’t begun trading yet
  • An ‘off-the-shelf’ company held by a company formation agent ready to be sold on
  • An existing company that has traded in the past, but is not currently trading
  • A company that will never trade because it has been formed solely to hold an asset such as property.

If you intend to make your company dormant, you should contact your Corporation Tax Office.

How long can a company remain dormant?

There is no time limit for keeping a company in a dormant status.

However, the directors must still perform the following administrative duties each year:

Preparing dormant company accounts

You don’t need to submit accounts to HMRC once you have informed them that the company is dormant, and no longer subject to Corporation Tax. Unless you subsequently receive a formal notice to submit a Company Tax Return.

However, dormant companies, even those who have not traded, must still file annual accounts with Companies House.

One advantage of being dormant is that you don’t need to provide as much information as you do for an active company.

If your company is ‘small’, then it only needs to file ‘dormant accounts’ with Companies House. These are far simpler than standard limited company accounts and don’t need to include an auditor’s report.

How to submit your dormant company accounts

Dormant companies that have never traded, can file their annual accounts online using the Companies House WebFiling service.

The online system includes checks to ensure you don’t omit any important information.

Alternatively, you can still submit the accounts on paper with Form AA02, which you can download here.

Companies that have traded in the past, but have become dormant may be able to use Form AA02 (DCA). But only if no transactions have been recorded in the current financial year and no residual balances exist.

During this time, the company must not generate any transactions at all, otherwise you will have to submit full accounts to Companies House, and meet any liabilities these transactions may create.

For more information on submitting dormant company accounts, try this handy guide on the Companies House blog.

Administration of a dormant company

Even though your company may be dormant, you are still required to file a Confirmation Statement which includes a Persons with Significant Control (PSC) register every year.

This costs £34 if you file online, or £62 if you file a paper return. See the GOV.UK details here.

If your active company was VAT registered, you must de-register within 30 days of the company becoming dormant.

If you decide to appoint a Company Secretary, Director, or need to change the details of any of these officers while the company is dormant, you must notify Companies House.

The same goes for any change of registered address.

You can submit any of these changes online with the WebFiling service, or with the relevant Paper Form.

Penalties for failing to submit documents to Companies House

Directors can be prosecuted if they don’t submit documents to Companies House on time. In fact, failure to do so is a criminal offence.

There is also an automatic civil penalty for the late submission of annual accounts – starting at £150 if your accounts are up to one month late. In severe cases, a dormant company could even be struck off the register.

Tax-efficient protection for directors

  • limited company life cover