In the face of financial challenges or a change in strategic direction, you might find yourself pondering whether to close your company or make it dormant.

This choice not only affects the immediate operational status of your business but also has long-term implications for your financial and legal responsibilities.

In this article, we’ll guide you through the essential considerations and implications of both closing your company and making it dormant.

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What’s the Difference Between Dissolved and Dormant?

Dissolved refers to the process of legally closing your company. This is a permanent action. Once the dissolution process is complete, your company ceases to exist. It cannot trade, incur debts, or engage in any business activities. The dissolution process involves settling all company debts, closing down all operations, and informing the relevant authorities and stakeholders of the company’s closure. After dissolution, you are no longer responsible for the company, but you must ensure that all legal and financial obligations have been fulfilled prior to dissolution to avoid personal liabilities.

Dormant, on the other hand, means that your company is registered as inactive. While dormant, the company does not engage in any trading activities or generate revenue, but it still exists as a legal entity. This can be a temporary status, allowing directors to pause their business activities without closing the company. Keeping a company dormant requires compliance with certain minimal reporting requirements, such as filing dormant accounts and annual returns, to maintain the company’s status with Companies House. This option is often chosen by directors who plan to resume business activities in the future or wish to retain the company for strategic reasons.

Can I Resurrect a Dissolved Company If Required?

Yes, it is possible to resurrect a dissolved company, but the process can be complex and requires adherence to specific legal procedures. The process for restoring a dissolved company is known as “restoration to the Companies Register.”

There are two primary methods to restore a dissolved company in the UK:

  1. Administrative Restoration: This method is available if you were a director or shareholder of the company at the time it was dissolved. Administrative restoration is only possible if the company was struck off the Companies Register by Companies House and not through a voluntary dissolution by the company’s members. To qualify for administrative restoration, the company must have been in operation at the time of dissolution. The process involves applying to Companies House, paying any outstanding fees and penalties, and bringing all filings up to date.
  2. Court Order Restoration: If administrative restoration is not available, you can apply to the court for a restoration order. This method can be used in a broader range of circumstances, including where the company was voluntarily dissolved by its members. You will need to demonstrate to the court why the company should be restored, which may include settling any outstanding debts or showing that the company had property or was in litigation at the time of dissolution. This process is more costly and time-consuming than administrative restoration.

Restoring a dissolved company reinstates it as if it had never been dissolved, making it able to trade, hold assets, and enter into contracts again.

What’s involved in keeping a company dormant?

Keeping a company dormant involves several important steps to ensure compliance with legal and financial obligations.

A dormant company, by definition, is one that has had no significant accounting transactions during the financial year. While the company remains registered with Companies House, it does not engage in any business activities or generate income. Here are the key aspects involved in maintaining a dormant company in the UK:

  1. Annual Filings: Even though the company is dormant, you are still required to file annual accounts and a Confirmation Statement with Companies House. The annual accounts must show that the company has made no transactions over the financial year, except for fees paid to Companies House for the filing of the annual accounts.
  2. Corporate Records: You must keep up-to-date corporate records, including details of directors and shareholders, even while the company is dormant. These records should be available for inspection if requested.
  3. Company Bank Account: Ideally, a dormant company should not have any financial transactions. However, it’s common for dormant companies to maintain a bank account. Any transactions within this account, apart from paying for the company’s annual filings or similar administrative expenses, could change the company’s status from dormant to active.
  4. Tax Obligations: Notify HM Revenue & Customs (HMRC) that your company is dormant. You won’t need to file Company Tax Returns or pay Corporation Tax while your company is dormant, but you must inform HMRC when your company becomes active again. Additionally, ensure that all taxes owed prior to becoming dormant are settled to avoid penalties.
  5. Insurance: Even as a dormant company, you might still need to consider insurance. For instance, if you hold any assets in the company’s name, you may need to maintain insurance cover for those assets.
  6. Statutory Obligations: Comply with any other statutory obligations relevant to your company. This can include maintaining any licenses or permits, even if the company is not currently trading.

Maintaining dormant status requires careful management to ensure that no transactions occur that could be interpreted as trading. If your company inadvertently engages in business activities, it could lose its dormant status, resulting in tax implications and the need to submit full accounts. Directors should periodically review their company’s status and transactions to ensure compliance with the requirements for being considered dormant.

Dissolved or Dormant: What’s the Best Option?

If you plan to restart your business later, keeping it dormant is practical. This approach saves the hassle of creating a new company and maintains your business name and any assets. It involves minimal annual filings and costs. On the other hand, if you’re certain about not returning to business, dissolving the company finalises its closure, freeing you from ongoing obligations. Dissolution makes sense for a clean break, eliminating the need for any filings or compliance. Consider your long-term business goals, financial situation, and the effort you’re willing to invest in maintenance when making your decision.