Jon Munnery gives expert advice on what to do if you are considering closing down your limited company.
Your limited company may have naturally reached the end of its lifetime due to impending personal retirement, redirecting your attention to other business or personal ventures or as a result of challenging trading conditions stemming from the coronavirus pandemic. The route you take will be determined by the financial health of your business; if your business is solvent or insolvent and if the decision is voluntary or forced on you by creditors.
There is a fine line between business viability, recovery potential and if the business is trading wrongfully. This refers to the continuation of trade after the business has become insolvent, putting creditor interests second, which is a serious offence. Due to the temporary suspension of wrongful trading rules as a result of the coronavirus pandemic, viable businesses experiencing a temporary struggle due to Covid-19 can continue trading without the threat of legal action.
If you believe that your business is unlikely to recover from the financial impact of Covid-19 and is no longer viable, the Creditors’ Voluntary Liquidation (CVL) route is an option. This is a formal insolvency procedure which will be administered by a licensed insolvency practitioner and is typically the result of long-term financial decline. To determine whether your business is insolvent, you should assess the weight of liabilities against assets which will illustrate the health of your limited company.
The limited company closure process will consist of realising assets to repay outstanding debts to creditors to maximise returns. If there are any remaining business debts after asset realisation, these will typically be written off upon the liquidation of the business, unless you are tied into a Personal Guarantee which enforces personal liability. The company will then be struck off Companies House, ceasing in existence.
If your business is healthy and isn’t showing signs of serious financial difficulty, you may be able to execute a Members’ Voluntary Liquidation (MVL) if you wish to close shop. This route is ideal for a solvent business for which the company director is interested in extracting funds in a tax-efficient manner. This formal exit planning tool is administered by a licensed insolvency practitioner for businesses which can settle outstanding liabilities within 12 months.
If your business has retained a profit of £25,000 or over, this can be a cost-efficient route. However, if it is lower, dissolving your limited company may be more appropriate. A Members’ Voluntary Liquidation is a tax-effective route as retained profits will be treated as capital and therefore subject to Capital Gains Tax (CGT) rather than income. If you qualify for Entrepreneurs’ Relief, you will pay a flat CGT rate at 10 per cent, subject to a lifetime limit of £1 million of qualifying gains for disposals made on or after 11 March 2020.
By submitting a DS01 form to Companies House to strike off your limited company, your intention to dissolve will be advertised in the Gazette. If there are no objections to your request, the limited company will be struck off Companies House two months later. If objections are filed against your request due to outstanding debts, you may need to consider a CVL or administration.
It’s vital to seek professional advice from a licensed insolvency practitioner to determine the most appropriate and tax-efficient, exit route for your limited company. If you are experiencing financial distress as a result of the coronavirus pandemic, there are support measures available which can help restructure business payments and assist you in recovering from the economic impact.
*Jon Munnery is a partner at UK Liquidators, the UK’s largest company liquidation website made up of licensed insolvency practitioners and turnaround specialists, offering fast turnaround, company closure services.