There are several different ways you can close down a limited company. The right method for you depends on the circumstances you find yourself in.
In this guide, we provide a brief explanation of the different limited company closure methods, describe when they are suitable and outline the costs involved.
How to Close a Limited Company
There are numerous reasons why you might want to close down a limited company. You might be ready to retire and have no one to carry the business on, the company might have served its purpose and you no longer have a use for it or it may not be financially viable.
Whatever the reason, the main factor that determines the closure options available to you is whether the business is ‘solvent’ or ‘insolvent’.
- Solvent – A solvent business is one that can pay all of its bills and outgoings, both in the short and long-term. Reasons for closing a solvent business include wanting to pursue other opportunities or choosing to retire.
- Insolvent – An insolvent business is one that cannot pay its bills when they become due, has a greater value of liabilities than assets on its balance sheet or is facing creditor pressure and threats of legal action. Reasons for closing an insolvent business include the realisation that the business is no longer profitable in its current form or simply wanting to move onto something new.
How to Close a Limited Company Without Debts
You have two main options if you want to close a solvent limited company. The right method for you will typically come down to the value of the company’s physical assets and the cash in the business.
The quickest and cheapest method of closing a solvent limited company is via a process called company dissolution, also known as voluntary strike off. This method is best suited to businesses with very few physical assets or that never really made much money. It’s also well suited to businesses that are no longer active and are unlikely to be used again.
To voluntarily strike off your business, all you need to do is complete form DS01 and send it to Companies House. If the form has been completed correctly and there are no objections to your application, your business will be struck off the Companies House register two months after submitting the application.
Things to consider:
- Cost-Effective – Applying to strike a business off the Companies House register is the simplest and cheapest way to dissolve a solvent limited company.
- Bona Vacantia – Any physical assets belonging to the company must be transferred or sold and the proceeds distributed among the shareholders. Any assets remaining after the company has been dissolved become ‘bona vacantia’, meaning ownerless, and they become the property of the Crown.
- Tax Concerns – A maximum of £25,000 of assets can be distributed as capital rather than income for tax purposes before the company is dissolved. If the company has cash and assets worth more than £25,000, a members’ voluntary liquidation (see below) could be more tax-efficient.
- Director Liability – If a director does not adhere to the rules surrounding company dissolution, particularly if the company has debts that it has not repaid, the director(s) can be made personally liable for those debts. They can also be fined or disqualified from acting as a company director for up to 15 years.
Cost: The fee for striking off currently stands at just £10. This should be sent to Companies House along with the completed form DS01.
Members’ Voluntary Liquidation (MVL)
A member’s voluntary liquidation (MVL) is a formal insolvency procedure that can be used to close a solvent limited company. A licensed insolvency practitioner must be appointed to realise the company’s assets, repay any creditors and distribute the money among the shareholders.
This procedure is common among companies that have more complex structures and greater assets than those that can be closed via company dissolution. To initiate a members’ voluntary liquidation, at least 75% of the members (shareholders) must agree to the process and the directors must sign a Declaration of Solvency. That is a statutory document that states the company will be able to repay its debts with interest within a fixed period that does not exceed 12 months.
Things to consider:
- Insolvency Practitioner Fees – A licensed insolvency practitioner must be appointed to realise the assets and close the company on your behalf. That makes an MVL significantly more expensive than voluntary strike off.
- Timing – The timing of the process is down to the company’s shareholders, so it can be instigated at the most tax efficient period of the year. The process is usually quite quick and problem-free.
- Tax Efficiency – Although an MVL has greater upfront costs than company dissolution, it’s more tax efficient. Capital extracted from the company is subject to capital gains tax rather than income tax. You may also be eligible for Business Asset Disposal Relief (BADR), previously known as Entrepreneurs’ Relief, which can reduce the rate of tax payable from 18% to 10% for the first million.
- Director Liability – The risk of personal liability issues and other penalties is reduced as the insolvency practitioner, in their role as the liquidator, will handle the proceedings and ensure your compliance with the rules regarding the solvency of the company.
Cost: Members’ voluntary liquidations start at around £1,500 for companies with a small number of assets and rise to £3,000 or more when a greater number of more valuable assets are involved.
How to Close a Limited Company With Debts
When closing a limited company with debts, if you cannot afford to pay the liabilities in full, whether it’s tax bills, loan repayments or redundancy costs, then you have two options. You can either choose to voluntarily close the company via a creditors’ voluntary liquidation (CVL) or wait for the forced closure of the company via a compulsory liquidation. Either way, in most situations you will not become personally liable for the debts of the limited company.
Creditors’ Voluntary Liquidation
A creditors’ voluntary liquidation or CVL is a formal insolvency procedure that is used to dissolve a limited company that is unable to pay its bills. Although the name may lead you to assume otherwise, a creditors’ voluntary liquidation is a process that’s initiated by the company directors. They will call a general meeting of the shareholders to begin the winding up process.
Once a special resolution of the shareholders has been passed, the directors must appoint a licensed insolvency practitioner to oversee the liquidation. They will value and sell the company’s assets and use the money raised to repay the company’s creditors in order of priority. The company will then be closed down and any debts that have not been repaid will be written off.
Things to consider:
- Liquidator’s Fees – The cost of a creditors’ voluntary liquidation can be daunting, particularly when there’s very little money left in the business. However, when compared with the alternative, it could be worth the directors paying the funds personally to put the company into liquidation.
- Control – One of the benefits of voluntarily liquidating the company is that the directors retain more control of the process. They can appoint a liquidator of their choosing and decide when the process begins.
- Potential for a Pre-Pack – Voluntary liquidation brings in the possibility of entering into a pre-pack administration. That will allow the existing directors to buy the liquidated company’s assets and form a new company to continue trading without the old company’s debts. This could be an option worth considering if the old company was blighted by expensive debt but the underlying business model was sound.
- Director Liability – During the liquidation, the liquidator will investigate the actions taken by the directors in the time leading up to the insolvency. If they find any acts of wrongful trading, misfeasance or fraudulent trading, you could be held personally liable for company debts or disqualified from acting as a company director in the future. However, by instigating the liquidation process yourself, you demonstrate your desire to put your creditors’ interests first, which will stand you in good stead.
Cost: This is usually the most expensive way to close a company, with the liquidator’s fee costing anywhere from £3,000 to £6,000 based on the complexity of the case. If the company’s assets do not cover these fees, the directors may be personally liable for the costs. However, it’s worth considering that using this form of limited company closure, you could be entitled to director’s redundancy pay. That averages around £12,000 and would more than cover the cost of liquidation.
If your company cannot pay its bills and you have not been able to reach an agreement with your creditors, your creditors can make an application for a winding up petition to be issued against your business. If the debt remains unpaid, the court can make a winding up order to shut down your company via a process known as compulsory liquidation.
The official receiver will be appointed to act as the liquidator. They will take over the company and the directors will cease to have any influence over the day-to-day running of the business. Claims from the company’s creditors will be invited and the company’s assets will be sold and the proceeds will be used, along with any cash in the bank, to repay the company’s debts as far as possible. The company will then be closed and removed from the Companies House register and any remaining debts will be written off.
Things to consider:
- Who Pays? – The cost of issuing a winding up petition and forcing a company into compulsory liquidation will initially be borne by the creditor. The creditor will hope to recoup these fees from the sale of the company’s assets once the company has been placed into liquidation.
- Control – The official receiver takes complete control of the company and the directors are legally obliged to cooperate with them. Failure to cooperate could lead to prosecution.
- Additional Risks – The compulsory liquidation process is far from ideal for any business. Waiting for creditors to wind the company up suggests that the directors were unaware of or ignoring the company’s financial state, which increases the risk of repercussions. The process can also take a long time and be extremely stressful for the directors.
- Director’s Liability – The official receiver will investigate the conduct of the director(s). This is the least preferable form of liquidation because it increases the likelihood of charges for wrongful trading. If the liquidator finds further debts were incurred after the directors knew the company was insolvent or acts of misfeasance or fraudulent behaviour, directors could be made personally liable for company debts, receive a fine or be disqualified from acting as a company director for up to 15 years.
Cost: Forcing a company into compulsory liquidation is expensive. It costs between £500-£800 to issue the winding up petition, around £1,600 for the court deposit and a filing fee of £280. These costs will initially be paid by the petitioning creditor, who will hope to recover them from the funds raised by the sale of the company’s assets. A liquidator must also be appointed if there are assets to recover. Their fee will be around £1,500 to £3,000 based on the complexity of the case.
How to Close a Limited Company with Entrepreneurs Relief
When you’re calculating the cost of closing a limited company, it’s not just the cost of the closure method that you should consider. The amount of tax payable on the assets you realise will have a big impact on the money you walk away with. At just £10, company dissolution is by far and away the cheapest way to close a solvent limited company. However, something called Business Asset Disposal Relief (BADR), previously known as Entrepreneurs’ Relief, is available on the assets realised through a members’ voluntary liquidation. That could help to reduce the tax payable on retained profits and the gains you make through the sale of company assets significantly.
Entrepreneurs relief reduces the rate of capital gains tax on shares and the disposal of qualifying business assets to just 10%. That represents a significant tax saving for company directors, sole traders and business partners, and even spouses and civil partners if they also meet the qualifying conditions.
To qualify for Business Assets Disposal Relief as a company director or employee, you must have a minimum shareholding in the company of 5% when the disposal is made. There is a lifetime limit set at £1 million of capital gains, after which point, you will have to pay capital gains tax at the usual rate. The deadline for claiming Business Disposal Asset Relief is the 31 January of the year following the tax year in which the sale or disposal was made.
Finding the Most Cost-Effective Closure Method
At Company Debt, we can advise you on the most cost-effective closure method for your limited company based on the circumstances you are in. Our licensed insolvency practitioners are also well placed to support you throughout your company closure and provide industry-leading advice on Business Asset Disposal Relief. Our initial consultation is free and without obligation, so please give us a call on 08000 746 757 or start a webchat with one of our team.