Business Closure

Closing a limited company isn’t an easy task. Whether it is a deliberate decision, or a necessity, understanding the process of closing a business is very important.

Even if your business is not under threat of liquidation, if you know what will happen if the time comes, that’s valuable insight that will benefit you, your team, and your investors.

Business closure is split into two factors, depending on whether your business is able to pay its bills. Let’s break them down in detail.

What is Solvency?

If a company is ‘solvent’, it has the funds or assets available to pay bills. The decision to close a company can be a conscious one, and there are a few beneficial reasons to do so.

Why Close a Solvent Company?

Here are the 3 main reasons a business owner may consider closing their business:

1. Retirement – If you are planning on retiring soon, closing your company and selling its assets is a tempting prospect. Instead of stepping down and handing the reins to a successor, you can tie up all loose ends and close your company via a voluntary liquidation.
2. Change of Business Venture – If your company has reached the natural end of its useful life and you want to either change what your business does or change direction, closing your existing company is an efficient way to do so.
3. Extract Funds for Tax Purposes – Closing a company while it is still solvent is the most tax-efficient way to put your business’ affairs in order. If you foresee financial difficulties later on, this can help you avoid the trouble.

How to Close a Solvent Company

There are two main ways to close a solvent company.

First, getting your company ‘struck off’ the Companies Register. This is also down as ‘dissolving’ your company. This is a common method, but is only possible if the following applies:

• Your business has not traded or sold stock in the last 3 months
• Your business hasn’t changed named in the last 3 months
• Your business isn’t being threatened with liquidation
• Your business has no agreements with creditors (such as a Company Voluntary Agreement)

If any of these don’t apply to your situation, you’ll have to voluntarily liquidate your company instead. If all four scenarios are true, you can begin the process of closing your solvent company.

Liquidating a solvent company is the other method of closing your solvent company and must be a mutual agreement between you and your directors. This is known as Members’ Voluntary Liquidation (MVL). 

The process of an MVL is overseen by a licensed insolvency practitioner. They will ensure all assets are sold and funds are distributed to the relevant parties (directors, shareholders, creditors) in the most tax-efficient manner. The liquidator will ensure the company is wound up correctly, with HMRC clearance.

Similar to striking off, liquidation is a way to cut your losses as a business, if you aren’t satisfied with your company’s financial situation, but it is still stable and able to pay bills.

What is Insolvency?

If a company has debts, and lacks the funds to pay them, they are considered insolvent. In this case, the company may be forced to close to pay off the debts, or to prevent them from trading any further.

How to Close an Insolvent Company

There are 3 ways to close an insolvent company. All 3 have advantages and disadvantages depending on your situation, which is why it is important to speak with the experts before committing to any of them.

First, administration. If a company goes into administration, it is taken over by an administrator, who will run your business and has full control over your assets. Their fees will be paid by your company.

Once they are in control, your administrator has a few options. They can choose to:

• Sell your business as a ‘going concern’ to another company
• Negotiate a Company Voluntary Agreement (CVA) so you can continue trading

In both of these scenarios, you can keep your existing team and continue working.

If neither are possible, your administrator will sell your assets as part of a Creditors Voluntary Liquidation (CVL). The money from the sale will be used to pay off as much debt as possible, then the company will be closed. If there is nothing to sell, it will just be closed.

Your administrator will have a year to act, but their contract can also be renewed.

‘Striking off’ your company is also an option if you are insolvent. You will be removed from the Companies Register if the requirements we mentioned earlier apply.

You can also liquidate your insolvent company if the other options aren’t possible or appropriate. In this case you will begin the process of Creditors Voluntary Liquidation (CVL) yourself, instead of an administrator doing it on your behalf.

This is when your financial stability has deteriorated to the point where creditors are threatening to issue a winding-up petition that will force your company into liquidation. This avoids the winding-up, and you close your company through the realisation of its assets. This will repay at least some of the debt and prevent you from trading further.

Other Ways to Close a Company

As an alternative to these methods, you can also allow your company to become dormant. This is possible provided your company is not:

• Carrying on business activity
• Trading
• Receiving income

Your company will still be registered but is essentially in limbo. You must continue to send annual accounts and a confirmation statement to Companies House even if your company is dormant.

When to Close a Business

Knowing when is best to close your business isn’t always easy, especially if you’re solvent. If you are having financial difficulties or want to close your business on your own terms, we’re here to help.

We’ll discuss your situation with you and outline what your options are. Then you can decide knowing what’s best for your company.

As well as providing in-depth resources about bankruptcy, debt, and insolvency, we’re always on hand to help you find the right solution.

Simply get in touch and we’ll help you reduce the hassle of business closure.