Unlike active companies, dormant limited companies do not trade at all. Although most enterprises registered with Companies House are processing income and expenditure, dormant companies are just standard limited companies which are inactive.
Despite being registered and incorporated, dormant companies are not permitted to carry out any type of trading activities. This includes buying or selling goods, buying property or business assets and managing company investments. In addition to this, dormant companies cannot pay directors a salary or employ staff.
As the reporting requirements are different for dormant companies, it iss vital that directors are aware of the distinctions between active and dormant businesses. While a company may not be trading, it will still be considered active if it keeps staff on its payroll or if the company continues to market its activities.
In order to meet the requirements of a dormant company, a business cannot undertake any type of trading activity and cannot receive any income at all.
Why would you own a dormant company?
While dormant businesses cannot trade and cannot, therefore, make a profit, there are advantages to registering a dormant company with Companies House. Normally, this will arise in one of two ways; either a company will be dormant from the moment it is incorporated, or an active company may become dormant.
In the first instance, an individual may choose to register a dormant company so that they can begin trading at some time in the future. Being proactive and incorporating the enterprise ensures that no-one else can register a company with the same name and this can be attractive to future company directors.
In addition to this, existing sole traders may want to create a dormant company in order to protect their name and reputation. Although a sole trader may have operated under a specific business name for some time, if it is not protected or registered with Companies House, someone else could launch a limited company under the same name.
By creating a dormant limited company, however, the sole trader can prevent anyone from doing this and still continue to trade in the way they feel is most appropriate for them.
When existing companies cease trading permanently, they are usually wound up. While this is standard procedure if the business is closing, in some cases, directors may want to temporarily cease trading. By changing the status of the company from active to dormant, directors benefit from fewer reporting requirements and lower costs but are still able to ‘re-activate’ the company at any time.
This can be particularly advantageous for smaller limited companies. Often, these types of enterprises employ a small number of staff and external circumstances may prevent them from trading. Rather than closing the business permanently, however, they can simply modify the status to dormant and retain the option to trade in the future.
How do you make an existing company dormant?
If you want to change the status of a company from active to dormant, you’ll need to contact HMRC. Generally, a brief statement to your local corporation tax office will suffice, providing you state the date from which the company will become dormant. Following this, you should receive confirmation from HMRC that the dormant status of the company has been accepted, as well as Notice to Deliver a Company Tax Return.
Unlike newly registered dormant companies, existing companies which are becoming dormant will have an active accounting period. It’s necessary, therefore, for existing companies which are becoming dormant to complete a return and pay any outstanding corporation tax.
Although you needn’t notify Companies House of a recent change of company status, they will become aware that the business is dormant. While reporting requirements are different for dormant companies, they do exist and will ensure that Companies House is aware of the change to dormant status.
Are there reporting requirements for a dormant company?
Unlike active companies, dormant companies are subject to a small number of reporting requirements. An annual confirmation statement, containing basic company details and dormant annual accounts must be submitted to Companies House on an annual basis.
In order to make this process simple and straightforward, Companies House has introduced new reporting methods, such as the AA02 form, which enables people to submit details pertaining to dormant accounts quickly and easily.
Whether companies are newly incorporated or have been trading for a significant period of time, modifying their status to dormant can have numerous benefits.
If the company is unable to trade at the present time, notifying HMRC that it is dormant can help to lessen the director’s administrative burden and reduce the associated costs, while still enabling the company’s operators to trade at a future date.
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