If you run a solvent limited company that has ceased to trade then you have two choices about how to close the business down.
In this article, we’re going to explore these two options and look at why striking off your company could be the easiest and most cost-effective way to close your company down.
NB: If your company is insolvent, you do not have the option of striking off and need to contact an insolvency practitioner such as ourselves immediately to consider your options.
What is Voluntary Strike Off?
Dissolving a limited company is the process of getting it struck off the Companies House Register. This process can be used in situations where a solvent company has fulfilled the purpose it was initially set up for, is no longer trading and is unlikely to be needed in the future.
Dissolving the company is the simplest and most cost-effective way to close a solvent company down and is an option for companies that:
- Have not traded or sold any stock in the last three months;
- Have not changed names in the last three months;
- Have no agreements in place with creditors such as ‘Company Voluntary Arrangements’; (CVA) and are not threatened by liquidation.
Striking off a company is not an option for insolvent companies. If the company is struck off before all creditors have been repaid then the directors can be held personally accountable for those debts. They can also be barred from holding future directorships for a period of up to 15 years. Directors also have to inform all members, employees and creditors about the strike off and ensure all funds are distributed lawfully.
Before the company is struck off its share capital, reserves or any other assets should be distributed to its creditors and shareholders accordingly. The maximum value of company assets and share capital that can be distributed on strike off is £25,000. Any funds that exceed this limit will be taxed as income. For that reason, if you are a higher rate taxpayer or the company’s assets are likely to exceed £25,000, a Members’ Voluntary Liquidation could be the better option.
Members’ Voluntary Liquidation Vs. Strike Off
A Members’ Voluntary Liquidation (MVL) is a formal process that can be used to close down a company in a tax efficient way. Examples of when an MVL might be used include:
- A family business where the owner wants to retire and there is no one to carry on the business;
- A business owner who wants to free up assets from an existing company to fund a new venture;
- Where the company was an IR35 company which is no longer required;
- A group of companies is being reorganised and a subsidiary company is not needed.
The MVL process is relatively quick and easy, but it is more expensive than applying to have the company struck off. That’s because a liquidator must be appointed to realise and distribute the assets to the creditors and shareholders on the company’s behalf. That brings administrative costs. However, this option may still make more financial sense due to tax considerations.
What’s the Members Voluntary Liquidation Process?
Once a liquidator has been formally appointed by the company, they take control of the company and start their administrative duties immediately. The directors no longer have control of the company or its assets and all correspondence and emails are redirected to the liquidator. A Declaration of Solvency must be signed by a majority of directors confirming the company’s ability to repay all its debts within a maximum period of 12 months.
Once the Declaration of Solvency has been signed, a general meeting is called for the shareholders and the resolutions are passed. Once the meeting has been held, the company bank account will be frozen, the liquidation will be advertised in the London Gazette and the relevant forms will be sent to the Registrar of Companies.
Factors to Consider when Deciding Upon Striking off a Company Vs. Liquidation
Strike off– Company dissolution is only possible if no insolvency procedures or threats of legal action exist or are pending against the company. The company must be solvent and the members, creditor and employees must be informed about the strike-off. The funds may not be distributed lawfully if this is not the case.
Members’ Voluntary Liquidation – a Declaration of Solvency must be signed by the company directors confirming the company can pay all its liabilities within a maximum period of one year. The appointment of a liquidator ensures all other statutory procedures are followed.
Strike off – If any irregularities come to light or if a creditor who has not been informed about the company’s closure makes a claim at a later date, your conduct as a director will be investigated. That could lead to a financial penalty, liability for company debt or disqualification as a director.
Members’ Voluntary Liquidation – On signing the Declaration of Solvency, if it later emerges that company liabilities do exist then you could find yourself responsible for those debts. The other penalties mentioned above may also apply.
Strike Off – The costs of a voluntary strike off are much less than an MVL, but it is not appropriate in every case. Strike off might be the best option for companies with no or very limited assets, or for sole directors who want to retire. In more complicated cases, the legal risks and tax costs need to be considered more carefully.
Members’ Voluntary Liquidation – This option costs considerably more, but the benefits could outweigh the cost if the company has significant assets. The assistance of a liquidator will provide greater reassurance that all your legal obligations are being met.
How can we help?
At Company Debt, we offer independent, confidential and no-obligation advice for company directors who are looking to close their business. We can help you identify the best route from a tax perspective and ensure you receive the protection you need. For more information, please contact our team today.