While setting up a limited company is a key process, so is closing it down. However, many contractors are not aware of what this entails and what they need to do before closing down their company for good. Before striking off a limited company, you have to close it down legally.
In this article, we’re taking a look at reasons why contractors want to close their company and what they need to do to accomplish it.
Closing down a company is more common than you think and may be the best option for you at a given moment. There are several reasons why people choose to close their company, including:
Returning to Full-Time Employment
One of the reasons why contractors close their limited company is because they want to go back to full-time employment. This can be due to several factors, such as not enjoying the responsibilities that come with being the director of a company and not feeling very stable, since you have to find new clients and work.
If you’re planning on going back to job hunting with the goal of finding permanent employment once more, it’s important that you close down your company properly before doing so, in order to avoid future regulatory and tax issues.
Reaching Retirement Age
Part of being your own boss and making your own rules is being able to retire when you believe the time is right. Many contractors choose to close down their limited company when they want to retire, although you could also sell it on as well. This means that companies that are performing well or have no issues with HMRC can also be closed, not just companies that are insolvent.
When it’s time to retire, then, go through all the steps you need to take to close down your company and enjoy the well-deserved benefits of all your hard work.
Becoming a Sole Trader Instead
If your business didn’t go as planned, you believe you haven’t reached the point when a limited company structure is beneficial tax-wise, haven’t raised the necessary capital, or simply prefer not to have director responsibilities (or pay corporation tax), you may want to become a sole trader instead.
While this is unusual, you wouldn’t be the first contractor to change their minds and prefer a simpler business structure. It’s worth remembering, however, that sole traders are not registered anywhere – you just start doing business as a sole trader and inform HMRC about it.
Typically, if your profits are below £30,000 it’s recommended that you operate as a sole trader and wait to incorporate your business later down the line. This is not a rule but it’s a good guideline that may help you to decide what the best operating structure for you is.
Opting for a Dormant Company Instead
While most companies are actively trading, there are still thousands of dormant companies registered with Companies House. They are characterised by less paperwork and admin requirements, as they don’t have to provide the same degree of detail in their reports.
Instead of closing down your company, making it dormant may be the best option for you. But why exactly do some contractors opt to have a dormant company instead of an actively trading one?
If you’re not ready to trade just yet but want to secure your name, for example, you can register the company to safeguard it. You may also want to set up everything and have it ready to go when you are prepared to start trading. Another reason to have a dormant company is to hold a specific type of asset, such as a freehold property or the head lease to a property.
Of course, dormancy is also an option when you want to take a break from trading. No matter the reason, be it because you’re unsure you have the assets to continue but don’t want to close it just yet or because you’re taking a break from your career, putting everything on hold may be the best solution.
That way, you can return to it later if you want. You can also close your dormant company if you wish. If you want to form another company at a later time, you can do so, although your name may not be available.
Wrap Up Unfinished Business
Before closing down your company, there are certain steps you have to take and business to wrap up. This includes the following:
De-Registering for VAT
If you had to register for VAT (for instance, if your VAT-taxable turnover is over £85,000), you will now have to de-register by completing a VAT 7 form. You will be contacted with the de-registration date and perform a final VAT return.
You will also have to inform HMRC that you’re no longer trading and intend to close the company. This will also prevent them from issuing reminders for corporation tax. You may have to submit a company tax return online.
Payroll and PAYE
You need to close down your payroll scheme as well after competing all the relevant RTI (Real Time Information). You need to handle all PAYE and national insurance contributions as well; this is done by deducting and paying any outstanding bills.
When contractors operate through their limited company, some assets are likely to be owned by the company. This means that you may have sell them before closure of the company.
Notify Other Key Parties
It’s crucial that you inform all the interested parties that you’re planning on closing down your company. This includes your employees, creditors, shareholders, pension fund trustees and directors who didn’t sign the closure application. If creditors aren’t notified, they’re within their rights to apply for the company to be restored if they so wish. In addition, you will have to notify the company’s insurer, banker and any accountants or advisers.
Many contractors think that, just because they want to close down their company, they can get rid of their old receipts or other records they’ve been accumulating, managing and organising over time. however, this isn’t the case.
While you’re used to having to keep records while trading, you will have to continue to keep them for 7 years after your business is struck-off; this means even when you close down your company, you’re not free from these responsibilities.
This includes not only bank statements but also any receipts or invoices you may have. You must also keep copies of the company’s liability insurance policy and schedule if you employed staff; this must be done for 40 years.
Simply put, a solvent company is one that pays its bills before closing down. If there isn’t enough money in the company to settle all its debts to creditors, closing the company will probably require you to seek professional advice and help, as it can become a more complex process.
If your company is insolvent, the interests of its creditors legally come before those of the directors or shareholders of the company.
As contractor accountants, Gorilla Accounting provide specialist advice for contractors, no matter the question, so let us know how we can help. Dealing with insolvency can be a complicated matter, but you don’t have to be all alone dealing with it all.
If you have trading debts, you have to pay them off before you close down your company. These debts include any bank loans and overdrafts, accounting fees, final corporation tax and VAT, money owed to shareholders or directors, money owed to suppliers, and any outstanding PAYE or national insurance.
If your company can’t pay its bills, the assets exceed liabilities and legal action over £750 has been taken out against the company, it’s highly likely your company is considered insolvent. If this happens, you have to arrange its liquidation. Directors can propose this if the company is unable to pay its debts and if 75% of shareholders (by value of shares) agree, which is called creditors’ voluntary liquidation.
If you owe creditors, you have to pay them first. If doing so is not possible, you may be forced into compulsory liquidation. Your creditors can go to court to get any debts paid, as they can request a court judgement or make an official request for payment (statutory demand). You may avoid liquidation if you apply for a Company Voluntary Arrangement, which allows you to pay creditors over a fixed period, if they agree.
Companies with debts can be solvent, but this probably means you need to apply for a members’ voluntary liquidation (MVL), which says the company’s assets have to be sufficient to meet all claims and costs within a year after liquidation.
If you company is solvent with no debts, you can apply to get the company struck off Companies House or start a members’ voluntary liquidation as well. Striking off the company is, usually, more cost-effective. An MVL means assets are turned into cash and distributed to shareholders.
A strike-off requires the submission of form DS01 to Companies House for a £10 fee, although you won’t be able to apply if, in the last three months, you were actively trading or changed the name of the company. You’ll be unable to strike off your company if it’s threatened with liquidation and if you have agreements with creditors (like a company voluntary arrangement) as well.
You can, however, settle trading or business debts and comply with statutory requirements.
If you’re looking to close down a limited company that never traded, you can apply for a strike-off, since you’ll likely have no assets or liabilities. However, it’s possible that you may have liabilities without having ever traded, as is the case with initial loans. In this case, you may have to liquidate the company.
If you’re happy with the amount of money you’re making and enjoying the benefits of owning a company but don’t like all the admin and tax responsibilities, Gorilla Accounting can help. So, instead of closing down your business, consider hiring the services of limited company accountants who will handle everything for you, freeing up your time to focus on your day-to-day, not on paperwork.
Another great thing about it is that, at Gorilla Accounting, we will take care of it for just £95 + VAT per month.
You’ll save time and money, as you won’t find a more convenient way to do your accounts than with our FreeAgent bookkeeping software either. If you’ve decided that closing down your company is the right thing to do, then we’re also more than happy to answer any questions you may have about the process and to help you along the way.
Contact us today, give us a ring on 0330 041 6095 or request a callback – you can also figure out your take-home pay by using our contractor tax calculator or read our guides to learn more about the contracting universe.