Dissolving a limited company is just one of the procedures that can be used to close a limited company that you no longer need.
In this guide, we’ll explain when a limited company can be dissolved, how the process works and what the consequences are.
What Does it Mean to Dissolve a Limited Company?
Dissolving or striking off a limited company is a straightforward and low-cost way to close a business as long as certain requirements are met.
If your limited company is solvent, can repay any outstanding debts and is not undergoing an insolvency process or does not have one pending, dissolution is an option available to you.
When you dissolve a limited company, it will be struck off the Companies House register and will cease to exist. Once the company has been dissolved, you will not be able to trade or carry on any business activities through that limited company.
The assets or cash of the company must be transferred to the ownership of the shareholders before the business is struck off the Companies House register or they will become the property of the crown.
For tax reasons, dissolving a limited company is only likely to be the most cost-effective way to close the company if the capital gain released is less than £25,000. If the value of cash and physical assets in the business exceeds that amount, a members’ voluntary liquidation (MVL) is likely to be more tax-efficient for the shareholders.
In the vast majority of cases, the decision to dissolve the company and strike it off the Companies House register is voluntary. However, Companies House can also force the dissolution of companies that have not met their obligations by filing their annual accounts and tax returns.
Why Would you Dissolve a Limited Company?
There are various reasons why the shareholders or directors of a limited company might choose to strike it off the Companies House register via the process of dissolution. That includes:
- Cash-flow issues – Although the business is solvent, it has recurring cash-flow problems that bring the business’s future viability and profitability into question.
- Disagreements between company directors or partners – It’s not unusual for company directors or partners to have a different vision for the business or their roles within it. If these disagreements cannot be reconciled, the best approach could be to dissolve the business and go their separate ways.
- Lack of leadership – Not everyone is up to or enjoys the challenge of running a business. In many limited companies that are dissolved, the lack of experience or expertise of a company director is a key factor. Rather than continuing on, sometimes the simplest option is to close the company down.
- Succession-planning failure – Another common reason for company dissolution is having no one to carry the business on. If the business owner wants to retire or take on a new challenge and there are no natural successors, there may be little option but to close it down.
- The business has run its course – The business may have been set up to capitalise on a specific opportunity that no longer exists. Rather than diversify products or venture into new markets, in some cases, it might be preferable to close the company down.
Can I Dissolve my Limited Company?
For voluntary dissolution to be a viable option for your limited company, certain requirements must be met. Firstly, the company must be solvent and be able to repay any outstanding creditors before applying for strike-off.
Dissolution should not be used by insolvent companies as a method of avoiding repaying their debts. There could be serious consequences for businesses that do. For a business to be eligible for company dissolution, the following conditions must be met:
- The business cannot have traded or sold any stock in the last three months
- The business cannot have changed names in the last three months
- The business cannot be threatened with liquidation or any other type of insolvency procedure or have an ongoing arrangement with creditors such as a company voluntary arrangement (CVA)
How do you Dissolve a Limited Company?
Once you’ve decided that dissolving the business is the most appropriate way to close it down, there are certain things you must do before making the strike-off application:
- Notify HMRC of your intention to close the company and file and pay your final tax returns.
- Cancel your VAT registration.
- Send P45s to all employees and directors and ask HMRC to close down the payroll scheme. You will need to consider staff redundancy payments and other payments that may be due, such as holiday pay and wages, for any staff that are being made redundant.
- Repay all creditors and notify them that the company is being closed down. Any creditor who is owed money and does not receive notification can apply for the company to be restored at a later date.
- Terminate leases, contracts and agreements with landlords, suppliers and finance providers.
- File the closing company accounts with Companies House and submit a final corporation tax return to HMRC and pay any liability due. Make sure you tell HMRC that those are the final accounts before dissolution.
- Divide any cash and physical assets between the shareholders before the date of dissolution. Any unallocated assets after the date of dissolution will become the property of the Crown.
When all of the above has been completed, you can then make the application for strike-off by submitting form DS01. The form must be signed by the majority of the directors and sent to Companies House along with a £10 fee.
Once the form has been accepted by Companies House, a dissolution notice will be placed on the company’s record and advertised in the local Gazette.
Your final job is to notify all interested parties that the company is to be dissolved by sending them copies of the application form within seven days.
The interested parties who must be informed include the staff, HMRC, creditors, shareholders, any directors who did not sign the application and the pension fund trustees.
How Long Does it Take to Close a Limited Company via Dissolution?
From submitting the DS01 application to the company being officially struck off the Companies House register takes three months.
However, you must also consider the three-month period up to submitting the application when the company cannot trade or sell any stock. This is when you can start taking the steps listed above to prepare the company for dissolution.
Realistically, from start to finish, the entire process will take a minimum of six months, but it could take even longer depending on the structure and complexity of the business.
While that may seem like a long time, this is not a process that can be hurried. If any of the steps are missed or are not completed properly, the company could be reinstated to the Companies House register so that further action can be taken against it.
How do you Close a Limited Company That Never Traded?
A company that never traded or is dormant can be closed using the company dissolution process. In this case, dissolving the limited company should be very simple because there are no creditors to be repaid, no staff to make redundant and no tax liabilities to pay.
However, final accounts should still be filed with Companies House. Once the application to strike-off has been accepted and the mandatory three-month objection period has been completed, the company will be struck off the register and will cease to exist.
How Much Does it Cost to Close a Limited Company?
One of the key benefits of dissolving a company is just how cheap the process is. When submitting form DS01 to Companies House, you must enclose a £10 filing fee. If the company has no debts to repay or assets to dispose of and realise, that may be the only cost you incur.
That compares favourably with a members’ voluntary liquidation, which is the process used to close a solvent company with assets that exceed £25,000.
A members’ voluntary liquidation must be administered by an insolvency practitioner, who will charge upwards of £1,500 for their time. If the company has debts that it cannot afford to repay, it must be closed via a creditors’ voluntary liquidation, with the costs starting at around £3,000.
Can I Just Close my Limited Company?
Rather than closing a limited company permanently via the dissolution process, it might be more suitable to temporarily close the business so you can trade through it again in the future.
In that case, you can effectively put the company ‘on hold’ by making it dormant. Rather than informing HMRC and Companies House that you are dissolving the business, tell them that you want to make it dormant.
You will still have to submit certain tax returns to HMRC, file annual accounts with Companies House, pay any outstanding bills and settle any corporation tax liabilities. However, you’ll then be free to pursue other opportunities or take a break from the business and return to it when you’re ready.
Why Would Companies House Dissolve a Company?
As well as company owners choosing to dissolve their limited companies voluntarily, limited companies can also be forcibly struck off the Companies House register by a third party, which is most commonly Companies House itself. This is done via a process called compulsory strike-off.
There are a number of reasons why Companies House might choose to strike a limited company off the register. That includes:
- It repeatedly fails to file its accounts on time
- It fails to submit its annual confirmation statement (form CS01) to confirm that the company’s details are up to date
- It fails to notify Companies House about a change of address of its registered office
If the company has ceased trading, the directors may see the compulsory strike off as a simple way to close it down. However, directors that allow a business to be forcibly struck off the register by Companies House will not be able to claim redundancy pay and other entitlements, which is a very serious consideration.
There’s also the risk that you could leave yourself open to personal liability issues and even be disqualified from acting as a director for up to 15 years.
For those reasons, it pays to be vigilant. Even if the company is dormant, you should continue to meet your filing obligations with Companies House and HMRC. You should also subscribe to notification services from the Gazette to make sure you’re aware if a strike-off notice is issued against your business.
How do you Stop a Company Being Dissolved?
Anyone who is connected with the business can object to it being dissolved. In most cases, objections will come from creditors, employees and company shareholders for circumstances that include:
- The directors have declared the business as solvent despite it having liabilities that have not been repaid
- An employee or a creditor wants to take legal action against the company to recover unpaid debts
- Not all parties have been properly informed that the business is being dissolved
- A third party suspects that the directors have committed fraud or traded unlawfully
- The business has not ceased to trade or has changed its company name during the three months prior to the dissolution application
Objections to the company dissolution can be sent by email or by post to the Registrar of Companies at Companies House.
On receiving the objection, the dissolution application will usually be suspended for a period of between three and six months to allow the claims to be investigated further.
In the case of a creditor who is owed money by the company, an objection can even be made after the company has been struck off the Companies House register. The company can then be restored to the register so that legal action can be taken to force the repayment of the debt.
If an objection from a third party is upheld by Companies House, an investigation will take place into the actions of the directors leading up to the dissolution.
If any acts of misconduct, wrongful trading or fraud are uncovered, the directors can be disqualified for up to 15 years and could even receive a custodial sentence.
Thinking About Closing Your Limited Company?
If your company no longer has a purpose or you want to close it down for financial reasons, talk to an insolvency practitioner today for the confidential, no-obligation advice you need. Call us on 08000 24 24 51 or email email@example.com.