Managing a company without having to take responsibility for your assets? This is possible with a limited company (Ltd) and is the reason that many business owners in the UK choose this legal structure. We explain what an Ltd is, its hierarchy, as well as naming some of the advantages and disadvantages of this kind of business structure.
A limited company (Ltd.) is usually founded and then exists for an unlimited time. But sometimes life doesn’t go as planned and the company needs to be closed (also known as ‘dissolved’). There are various reasons that can lead to this; economic failure isn’t always the reason. The company owner may voluntarily decide to dissolve the company, or Companies House may have made the decision if the business failed to pay taxes. In order to close a limited company, there are a few steps that need to be taken; you can’t just quit doing business. It can be a complex process, but an Ltd. must formally terminate. If you don’t completely cancel the business, it will still be liable for taxes and annual reports and can also still be sued.
- Why close a limited company?
- How to close a limited company (solvent)
- How to close a limited company (insolvent)
Why close a limited company?
The decision to dissolve a limited company is not always of the founder’s free will. Economic reasons, but also legal or personal circumstances may require the company to close down. Here are some possible reasons:
- Low cash flow
- Negligent accounting practices
- Defective products
- Partner disagreements
- Succession-planning failure
Other reasons could be that the owners think a different legal form would perhaps prove to be more suitable for achieving the company’s objectives or maybe the shareholders want the business to go in a different direction i.e. have a different business purpose. A dissolution may be:
Judicial: A court can dissolve a business for failure to comply with UK regulations or failure to pay tax. More common, however, is judicial dissolution as a result of a lawsuit brought by disgruntled Ltd. members who wish to unravel their business ties. A compulsory liquidation can be issued if a company owes you more than £750 and can prove that the company cannot afford to pay you.
Administrative: Imposed by Companies House and usually the result of failing to either comply with UK regulations or file annual returns.
Voluntary: The result of members willingly choosing to close their business. This can happen in two ways. First, members can determine certain dissolution-triggers (such as the death of a member), in writing when forming the Ltd. Second, members can cast a vote to dissolve the company at any time.
Possible reasons for dissolution can be agreed upon in the articles of organisation when creating an Ltd.
How to close a limited company (solvent)
As long as the company’s directors agree, the procedure for closure can begin. The process can go one of two ways depending on whether the company can pay its bills or not. If the bills can be paid (solvent), you need to apply to get the company struck off the Companies House register (a more detailed explanation follows). This is usually the cheapest way to close the limited company.
Getting struck off the Companies House register
To close/dissolve a limited company, the directors simply need to fill out the DS01 form as well as paying £10 to Companies House (note that you can’t pay with a cheque from the company that is about to close).
This, however, isn’t the case if the company is to be dissolved by Companies House itself. This could be due to not having a director appointment in place or because the company has failed to file annual returns and/or accounts.
The form must be signed by all the directors and sent to Companies House in Edinburgh, Cardiff, or Belfast, depending on where the company was registered. If everything’s ok with the form, the local Gazette (the official newspaper record in the UK) will publish your request in their London, Edinburgh, or Belfast edition. As long as no-one objects during the 2 month notice period, the closure can go ahead.
Once the company has been closed, it will stay on the Companies House register and be marked as “dissolved”. It will stay this way for 20 years, then won’t be visible anymore. The reason for the two-decade stay is to make sure that the company is no longer needed.
There is, however, a way to make your company disappear off the register sooner, but not every company is applicable for this and The Companies Act 2006 is the body that gets to decide this.
When a company can be struck off the register
- If the directors want to retire and no-one else will take over the business
- If the company is a subsidiary and the name is no longer needed
- If the company was originally founded for an idea that didn’t work out
Companies that are dormant or have ceased training can be struck off. The good news is that you’re rarely charged any late filing penalties unless you decide you want the company back on the register at a later point.
When a company can’t be struck off the register
The company shouldn’t apply to be struck off if any of the following has happened in the last three months:
- The company has traded or continued business
- The company has changed its name
- The company has done any other activity
Liquidate the company
The other option is to liquidate the company, but one of the following must also apply:
- You plan on retiring
- You want to step down from the family business and no-one wants to take over
- You simply don’t want to run the business anymore
You’re required to pass a resolution for members’ voluntary liquidation, which involves either making a “Declaration of solvency” (for companies in England and Wales) or getting hold of form 4.25 from the insolvency service Accountant in Bankruptcy (for companies in Scotland). For the Declaration of Solvency, you need to review your company’s assets and liabilities and write a statement saying that the directors have assessed the company and are quite certain that it can pay off its debts. As well as including the usual information such as the company’s name and address and the director’s name and address, you need to say how long it will take to pay off the debts – this must be within 12 months from when the company is liquidated.
The declaration (for England/Wales) or the form (for Scotland) must be signed by the majority of directors with a solicitor or “notary public” present. A meeting with shareholders needs to take place within the next 5 weeks so that a resolution for voluntary winding up can be passed. It’s a good idea to hire an insolvency practitioner to be present at the meeting so they can be in charge of winding up the company. The next step is to advertise with The Gazette newspaper within 2 weeks.
The signed declaration should be sent to the relevant Companies House or form 4.25 should be sent to the Accountant in Bankruptcy (depending on where the business is registered) within 15 days of passing the resolution.
How to close a limited company (insolvent)
If your company is classed as “insolvent”, it means it’s unable to pay off the debts it owes. The creditors (the ones needing to be paid) must receive their money before any is distributed to shareholders or directors.
Arrange liquidation with the creditors
The company must follow the same liquidation procedure as a solvent company would follow (explained above). If the company fails to pay its creditors, it will be forced into compulsory liquidation. This entails the creditors (the people the company owes money to) applying to court to get their money. This is done by either getting a court judgement or making an official request for payment (known as a “statutory demand”).
Responding to a court judgment
In order to respond, you must do one of the following:
- Pay off the debt
- Agree with the creditor to pay the debt at a later date (e.g. with a company voluntary arrangement (CVA), which allows you to pay the money back over a certain time)
- Put your company into administration, meaning you’re protected from legal action and don’t have to pay your debts in full
- Apply to liquidate your company yourself
- Protest the court judgment if you do not owe the money or didn’t receive nor respond to the claim from the court about the money owed
You must respond with one of these options within 14 days otherwise the creditors can request to have your assets taken away by bailiffs.
Responding to a statutory demand
There are several ways in which you can respond to a statutory demand:
- Pay off the debt
- Agree with the creditor to pay the money off at a later point (e.g. using a company voluntary arrangement)
- Put your business into administration
- Apply to liquidate your company yourself
If you don’t respond within 21 days, your creditors have the right to liquidate your company.
The best idea is to hire a solicitor or insolvency practitioner for professional advice on what to do in the case of insolvency.
Allow the company to become dormant
You don’t officially have to close your company if it’s no longer trading. By letting the business become dormant, it mean it’s exempt from paying taxes. This is only an option if your company isn’t:
- Continuing its business activity
- Receiving income
You can keep the company dormant for as long as you wish, but it will still be registered at Companies House.