How to Close a Limited Company

Fintech Harbor Consulting | How to Close a Limited Company
Reviewer: Bohdan Popovchenko
Reviewer: Illia Ivanko
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For most people an important stage in their life is the creation of their own business – the opening of a company. But there are situations when the business can no longer function. In this regard, it becomes necessary to close the company.
How to shut down a limited company? The process of closing a limited company depends on many factors. And sometimes, in order to close a firm, it is important to take the help of professionals. This will save you money and most importantly – time.
Before filing documents for the liquidation of a limited company, it is necessary to understand whether your business is solvent or insolvent. It is this criterion, I can call it «point of departure» that underlies what actions will need to be taken and what documents will need to be prepared.
If the company is solvent, the directors have the right to apply to Companies House with a request to voluntarily remove it from the register. In addition, you can independently begin the voluntary liquidation of participants.
If your company is insolvent, the directors may offer a creditors’ voluntary liquidation. This method of liquidation is possible if at least 75% of the voting shareholders (by the value of their shares) agreed to the closure by making a decision on liquidation.
In addition, is allowed compulsory liquidation – process when an insolvent company can be forced into liquidation by creditors or HMRC.
Regardless of the method you choose how to dissolve a limited company, the following steps in this process can be distinguished:
  1. make a formal decision to close the company by a majority decision of votes;
  2. notify HM Revenue and Customs (HMRC) of the closure of the company;
  3. pay off all outstanding debts and obligations of the company.
  4. prepare final statutory accounts and financial statements prior to the termination date;
  5. complete Form DS01 to apply for a voluntary dissolution. I emphasize that it is possible to close limited company online. In any case, the form must be signed by a majority of the directors of the company;
  6. submit all required documents to Companies House including completed Form DS01, final reports and any other required forms;
  7. inform employees about the closure of the company, making all necessary payments;
  8. inform partners about the dissolution of the company;
  9. distribute or liquidate company assets (if possible);
  10. receive a notice from Companies House confirming the dissolution of the company. At this point, the company ceases to exist as a legal entity.
In view of the foregoing, the answer to the question of how to close down a limited company may not be so simple and unambiguous.
Fintech Harbor Consulting | How to Close a Limited Company

Closing limited company and its differences from a regular company

The winding down a limited company or the liquidation of a limited company is the process of dissolving a company. Compared to the liquidation of an ordinary company (sole trader or partnership, for example), the closing down a limited company has it’s own characteristics, namely:
  • legal requirements: depending on the jurisdiction, the legal requirements for closing a limited company may differ. These requirements usually include notifying the relevant government authorities, filing the necessary documents, settling existing debts, fulfilling obligations to shareholders, including the distribution of remaining assets to shareholders. Without going into details, it is easier to close an ordinary company, since it is not required to liquidate a legal entity;
  • legal entity: a limited company is a separate legal entity from its owners while a regular company is not. In other words, a limited company has its own legal rights and obligations that are different from those of its owners. In a conventional company, the owners are personally liable for the debts and obligations of the company;
  • limited liability: the liability of the shareholders or members of a limited company is limited to the amount they have invested or guaranteed the company. In a conventional company, the owners have unlimited liability. This means that the shareholders are personally liable for the debts and obligations of the company;
  • ownership structure: a limited company is owned by its shareholders, who own shares in the company. Shares in turn can be transferred or sold. In a typical company, ownership is held by one person or a group of partners;
  • tax consequences: there may be different tax consequences when closing a limited company compared to a regular company. There may be different tax liabilities associated with capital gains, distributions to shareholders or transfers of assets.
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Possible reasons for dissolve a limited company

Dissolve a limited company, just like registering a business depends on many circumstances. There are several reasons for liquidating a limited company. So,

1 reason: the goals of the company planned by you for the achievement of which it was created have been fulfilled; Some companies were created solely to capitalize on the current situation. For example, at the beginning of the spread of the pandemic due to Covid, food and drink delivery services were in maximum demand and brought enormous profits. On the “great guns”, many firms established their own business – the delivery of anything. However, the situation has changed, and the delivery of goods does not bring profit as at the very beginning. If there is no need for the existence of the company further, there is no need to pay salary, taxes;

2 reason: the company has never traded. The limited company has never traded. Therefore, no further step is required. In this connection, it can be dissolved without trading or receiving income or debt;

3 reason: the directors want to transform the limited company into a partnership or sole proprietorship. In this case, the directors may agree to dissolve a limited company, divide the assets and conduct business separately as sole proprietors or as part of another legal entity;

4 reason: the need/desire to change the jurisdiction of the company’s incorporation. If it becomes necessary to transfer the jurisdiction of the company, for example from Scotland to Wales or vice versa, you must dissolve the old company and register a new one in the new jurisdiction;

5 reason: the director/owner died. If there are multiple owners, the business can continue to operate. However, if the owner and director are the same person, the answer regarding the transfer of ownership through inheritance should be sought in the company’s articles of association. A new director may be appointed if the articles of association so provide. However, a decision may be made to dissolve the company instead;

6 reason: directors are retiring. When business owners retire, the company’s cash and assets can be distributed. But, as an option, you can withdraw money from the company and close it. If you have over £25,000 of net assets in the business, MVL (Member Voluntary Liquidation) may be your best option;

7 reason: there is no person to whom the management of the limited company could be delegated (for example, new investors, shareholders). This reason is completely similar to the reason for closing a company due to retirement. If there are no successors or new shareholders, and the only option left is to wind down the business and dissolve it. If new shareholders or successors cannot be found, the directors may have no choice but to close the company;

8 reason: liquidation for reasons of public interest. If the activity of the enterprise is not in the public interest, the company may be forcibly liquidated. The liquidation of a company for any reason that may affect the rights, health, welfare or financial position of the general public is a valid reason for such dissolution. If the Secretary of State provides sufficient evidence to show why the business should be wound up, the courts will consider whether it is appropriate to wind up the company under the circumstances;

9 reason: insolvency. There are two types of processes that lead to the liquidation of a company, namely forced liquidation and voluntary liquidation.

Fintech Harbor Consulting | How to Close a Limited Company

Limited company closing down process

There are next ways to close a limited company:

1 way – Voluntary strike off;

2 way – Members’ Voluntary liquidation (MVL);

3 way – Creditors’ Voluntary Liquidation of an insolvent company;

Please, note that you can also make your limited company inactive (dormant) if you are not completely sure that you want to liquidate your business or think that you will be able to use the company in the future.

Voluntary strike off

A limited company may be voluntarily struck off the register of Companies House, provided that it is solvent (in other words, the company is able to pay any outstanding debts) and no longer trades in any form. The directors may be held personally liable if the company is wound up without repaying all of its debts. Before applying for the exclusion of a limited company, it must be legally closed. Voluntary deletion is a fairly simple process that does not require expert advice. This is generally the best option, especially when the company’s retained earnings are less than £25,000.
A company is eligible for strikeout if it meets certain conditions:
  • during the previous three months, the company should not have been trading or otherwise doing business;
  • during the previous three months the company should not have changed its registered name;
  • there must be no threat of liquidation of the company or any existing agreements of creditors (for example, CVA).
The Application Form to Delete a Company (DS01) may be filed with Companies House provided that the company has not traded for three months. I focus on that. that if the company has never traded, the closing process is faster as there is no need to wait until the three-month non-trading period expires before applying.
The company’s bank account must be closed within a three-month non-trading period to prevent transactions from going through. If this is not done, HMRC considers that trading is still taking place.
If the company is registered for VAT, PAYE and income tax, the company must also notify HMRC of its intention to close the company.
Upon receipt of the application, Companies House will publish a notice in the Gazette to give any interested parties the opportunity to object to the exclusion. Companies House will also review HMRC to determine if there are any outstanding tax liabilities. The liquidation process will take a couple of months.
Company accounts must be prepared before the last trading date. These reports must be submitted to HMRC along with the final tax return for the same period. Corporate tax will need to be paid as usual if there is taxable profit in the last trading period. Subject to the foregoing, you need to ensure that this tax and any other obligations are paid before you close the bank account of a limited company.

Voluntary liquidation of members (MVL)

Another liquidation option is the voluntary liquidation of members (MVL). The essence of this type of liquidation is the transformation of the assets of a solvent company into cash, with subsequent distribution among shareholders.
In order to dissolve a limited company by voluntary liquidation of the members, the directors must declare that the business can pay its debts in full within 12 months from the commencement of the liquidation process. In addition, the following steps will be required:
  • companies registered in England and Wales must file a declaration of solvency. In turn, companies registered in Scotland must request Form 4.25 from the Accountant in Bankruptcy;
  • within 5 weeks, the directors of the company must propose a special decision on the voluntary liquidation of the company. A majority vote of at least 75% is usually required for a decision to be made;
  • when a special decision is made, the notice must be published in the Gazette within 14 days;
  • a liquidator is appointed who takes control of the business and oversees the liquidation process;
  • the liquidator completes and submits Form LQ01 to Companies House within two weeks of being appointed;
  • upon completion of the liquidation process, the arbitration manager convenes a general meeting of creditors and participants. A full progress report on the liquidation is presented at this closing meeting. Notice of the meeting must be published in the newspaper at least one month in advance.
A progress report must be sent to Companies House within one week of the meeting, along with the final closing meeting. The company will be dissolved approximately within 3 months after the filing of the progress report and the Return of Final Meeting at Companies House, provided that the court does not issue an order to postpone the dissolution.
The main tax advantage of closing a limited company using MVL, compared to a voluntary exemption, is that the distribution of retained earnings to shareholders is subject to Capital Gains Tax (CGT) as opposed to dividend or income tax. If you have more than £25,000 in cash reserves, you can profit by paying tax at a rate of just 10% using MVL. This allows you to close your limited company in the most tax-efficient manner.
While £25,000 is the legal threshold to qualify for an MVL, most financial experts agree that you need around £35,000 in net income for an MVL to become truly profitable due to professional liquidators’ fees. Unlike the voluntary exemption, profits above or below £25,000 are not differentiated. All profits will be subject to CGT.
With MVL, profits are distributed to shareholders as capital gains and are thus subject to capital gains tax rather than income tax. It is this feature that is the key difference, as it can mean a much smaller final tax bill if you also qualify for the liquidation of business assets exemption. At the same time, the tax rate is only 10%. However, you will need to appoint a licensed arbitrator to manage the process and this usually costs several thousand pounds. In addition, it may take up to 12 months for the process to be fully completed. Even taking into account the arbitrage manager’s commission, MVL can be much cheaper if you have large retained earnings.
Payments from the voluntary liquidation of a company may be subject to income tax under the following circumstances:
  • the company is a “Closed Company” (i.e. has five or fewer shareholders);
  • within two years after receiving the distribution, the owner is engaged in a similar trade or activity;
  • the liquidation of the company, apparently, is aimed at reducing taxes.
There is a point of view that MVL cannot be used by directors who intend to form another company after closing their current limited company and making a profit.
If a company is struck off when its share capital or undistributed reserves or any other assets have not been distributed to the shareholders, that undistributed property becomes the property of the Crown by virtue of the Bona Vacantia.
Once struck, a company may be reinstated in the Companies Registry within six years of winding up. However, it should be emphasized that this can be a rather complicated process. Business documents must be kept for 7 years after the liquidation of the company. If your company is unable to pay its debts, you cannot apply for a voluntary exemption and you may have to liquidate your company through an MVL.

Creditors’ Voluntary Liquidation of an insolvent company

A creditors’ voluntary liquidation will be required if you wish to close a limited company that is unable to pay its bills. To start this process, a director should call a general meeting of the shareholders. A special resolution of the shareholders must be passed to initiate the winding-up process. The director(s) must then:
  • appoint a liquidator to take charge of the company and oversee the liquidation
  • send the resolution to Companies House within 15 days of the meeting
  • advertise the resolution in the appropriate Gazette (ащк London/Edinburgh/Belfast)
  • the company should also hold a creditors’ meeting within 14 days of passing the resolution. Creditors must be given at least 7 days’ notice of this meeting and it will also need to be advertised in the Gazette. A Statement of Affairs (summary of the company’s assets and liabilities) must be presented at the creditors’ meeting, and a copy should be given to the liquidator afterward.
The liquidation process will be completed when all assets (if any) have been converted into cash and paid to creditors in order of priority. The company will be struck off the register within approximately 3 months of the liquidator holding a final meeting.
Fintech Harbor Consulting | How to Close a Limited Company

Everything you need to know when closing a limited company

Before you close a limited company, please consider the following points:
  • it will be necessary to de-register the company as a VAT payer – inform HRMC of your decision to de-register your company as a VAT payer through the VAT form 7.
  • corporation tax payment – you must inform HMRC that your company is no longer trading so that they will not issue further corporation tax reminders.
  • meet capital gains obligations – sell or transfer ownership of any equipment purchased by the company that is owned by the company (note that capital gains tax may be charged on the sale)
  • PAYE Scheme – notify HMRC that your PAYE scheme is no longer active and needs to be closed.
    When choosing methods of liquidation, one should assess the financial position of the company, and only then choose methods of liquidation.
Each of the methods of liquidation of a limited company has its advantages and disadvantages.
a Voluntary strike-off
advantage: informal or voluntary removal is a fairly simple process that does not require expert advice. You can apply yourself. This will save you money and time. In case your retained earnings are below £25,000, then this might be the best option.
disadvantage: if your company has large retained earnings (over £25,000 for example), in this case a voluntary liquidation of members (MVL) is a good fit for tax purposes.
Members’ voluntary liquidation (MVL)
advantage: If you have a lot of retained earnings, MVL is much more tax efficient than voluntary exclusion.
disadvantage: MVL liquidation can take longer than deregistration and you will have to appoint an insolvency specialist. And this means that you will come to spend additional time on liquidation. And spend extra money when hiring specialists.
Please, note that if your company goes into liquidation and has been trading for two or more years, you may be able to claim a director’s payout upon termination. You can apply for the dismissal of a director at any time, but no more than 12 months after the liquidation of the company. No matter which method you choose to close your company, you must keep financial records for at least 7 years after your company has ceased operations, including accounting records, tax returns, PAYE statements, receipts and bank statements.
What documents need to be prepared
As has been repeatedly mentioned, closing a company is a certain algorithm that includes a series of actions to prepare documents in order to notify certain authorities, individuals or legal entities. When closing a limited company, it is necessary to prepare the following documents/carry out the following actions:

1 action – the directors of the company must decide to start the liquidation process and obtain the consent of the shareholders for liquidation;

2 action – notify Companies House of the decision to close the company by filling out the appropriate form: DS01 (Striking off application) or DS02 (Withdrawal of striking off application);

3 action – prepare the final accounts of the company, in particular: the statement of assets and liabilities, as well as the report of the director. The above documents must reflect the real financial position of the company on the date of its closing;

4 action – nform HM Revenue and Customs (HMRC) of the closure of the company. Settle all outstanding tax liabilities. Obtain a tax clearance certificate from HMRC as proof of tax clearance;

5 action – prepare a dissolution statement that confirms that the company has settled all of its debts and obligations or has taken a number of steps to pay them off. The application must be signed by a majority of the directors of the company;

6 action – notify all known creditors and employees of the closing of the company. Fulfill obligations to employees: pay salary, pay debts (if any);

7 action – hold a final meeting with the directors and shareholders of the company to formally approve the dissolution of the company. At this meeting, record the decision of the directors/shareholders on the liquidation of the company as a protocol;

8 action – inform business partners or suppliers of the closing of the company;

9 action – close the company’s bank accounts and distribute the remaining assets among shareholders in accordance with their shares;

10 action – file final reports and tax returns, documents with Companies House and HMRC respectively;

11 action – cancel VAT registration by notifying HMRC if the company was a VAT payer;
In any case, the list of documents and actions related to the closure of the company should be assessed based on the method of liquidation of the company and other factors. A comprehensive assessment will help you save time and money associated with liquidation later on.

How long does it take

It cannot be said unequivocally and guaranteed that the entire process of dissolution of a company “from A to Z” will take 3 or for example 5 months. As a rule, it takes at least 3 months for the dissolution of a limited company from the date of the announcement of liquidation in the Bulletin, but the length of time can vary considerably if the process is complex. Many factors, ranging from the solvency or insolvency of a company to issues such as reporting to the tax authorities, must be taken into account when estimating the time frame for closing a company.

What is the price

The amount required to close your business will depend on the liquidation process chosen. If you liquidate your business by filing form DS01 with Companies House – striking off a solvent company, you only need £10. Also, you can do it yourself. There is no need to involve third parties. But if you choose other liquidation processes (Members’ Voluntary liquidation or Creditors’ Voluntary Liquidation) be prepared for closing amounts of at least £1,500.00 and up.

What permissions do I need

The dissolution of a solvent limited company requires the approval of a majority of the directors. The consent of the directors is confirmed by signing an application for exclusion, which is then submitted to the Companies House.
In order to liquidate a limited company by voluntary liquidation of members or voluntary liquidation of creditors, 75% of the votes of shareholders must be cast in favor of liquidating the business. It is also possible to close the company forcibly at the request of a third party. In this case, it is necessary to obtain permission from the court by filing an application for liquidation.

What are the legal implications

Closing a limited company entails a number of legal consequences and obligations. These implications and obligations include:
  1. before starting the process of closing, the company must fulfill certain legal requirements: to hold meetings of directors and shareholders of the company to decide on liquidation or dissolution;
  2. settle debts and obligations to creditors, employees and other third parties. In the event that the company is insolvent, the process may include liquidation, where an insolvency practitioner is appointed to manage the distribution of assets to creditors;
  3. respect the rights of employees whose interests must be taken into account when closing the company. Employment contracts may be terminated and employees must be duly notified and any arrears in wages or benefits paid;
  4. the directors have certain legal obligations during the closing process. In the event of a company’s insolvency, the directors must act in the interests of the company’s creditors and ensure that all legal requirements are complied with;
  5. once the closing process has begun, certain notices must be given: to notify the Companies House of the intention to dissolve or liquidate the company, as well as creditors and other interested parties;
  6. closing a limited company also comes with tax liabilities. The company must file final tax returns, settle all outstanding tax liabilities and deregister for VAT (if the company is a VAT payer);
    Please note that the legal consequences may vary depending on the circumstances and the type of closure (dissolution or liquidation).

FAQ

There are next ways how to close a limited company:
1 way – Voluntary strike off
2 way – Members’ Voluntary liquidation (MVL)
3 way – Creditors’ Voluntary Liquidation of an insolvent company
Please, note that you can also make your limited company inactive (dormant) if you are not completely sure that you want to liquidate your business or think that you will be able to use the company in the future.

If your company has not carried out any activity since incorporation (dormant company), it must be classified as “inactive” by HMRC. In this case, the company will not be registered as active for income tax purposes or any other tax liabilities such as VAT or PAYE. If the company has not received or spent money during its existence, and capital gains have not been received from the sale or disposal of any business assets, business taxes are not paid or any tax returns are not filed.

There is no single answer or accounting estimate to the question “how much does it cost to close an LLC”. In addition, to the obligation to repay debts (if any), as well as pay salaries to employees (if any), there are various administrative costs associated with closing a company. It is important to understand the general approach to the costs of winding up a limited company: the amount of costs depends on the way in which the company will be liquidated, namely:

Option 1. Striking off a solvent company.
The easiest and cheapest option. You will be required to pay a fee of £10 to Companies House when applying for an exemption.

Option 2. Members’ Voluntary liquidation.
This option is already more expensive than the first. You will be required to pay a liquidator’s fee, which can range from £1,500 plus VAT. The total cost will depend on the complexity of the liquidation process. Many liquidators quote a fixed price for their services. You will also have to pay a fee to the Gazette for announcing your company’s liquidation (https://www.thegazette.co.uk/place-notice/pricing).

Option 3. Creditors’ Voluntary Liquidation.
The most expensive way to close limited company. The liquidator’s fee depends on the complexity of the process and the amount of work required. According to average estimates, the amount will vary from 3,000 to 7,000 £. If the company’s assets do not cover these fees, the directors may be personally liable for the costs.

Option 4. Compulsory Liquidation.
In this case, liquidation is enforced by creditors or HMRC. The cost of filing for liquidation is also paid by the creditor and not by the company. But it should be taken into account that any assets and finances belonging to the company will be confiscated by the liquidator and used to pay creditors.

There are two options for closing limited company with VAT debt — a voluntary company agreement (CVA) or a voluntary liquidation of creditors (CVL). In general, the best way to close a company with debts is to enter CVL.

Striking off a solvent company this is the easiest and cheapest way to close LLC. You will be required to pay a fee of £10 to Companies House when applying for an exemption. BUT to use this option, the company must meet the following criteria:

  • there was no trade (business) during the last 3 months;
  • the company has not changed its name in the last 3 months;
  • not subject to any prospective or ongoing litigation;
  • the company has not alienated the value of property or rights.
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