Should I close my limited company or make it dormant?

If you’re even considering the question of closing your limited company or making it dormant, something pretty fundamental is likely to have changed since you first decided to start your venture.

Here, exclusively for ContractorUK, I will explore the possible reasons why you’re having to consider closure and dormancy which in turn will determine the best way forward, writes Richard Hunt, a director at SFP Group.

To be insolvent -- or not to be insolvent?

That is the question! And it’s a key question here actually, because it just so happens to be the natural starting place to split out some possible options in the dormany versus closure debate.

Let’s break things down into the two possible scenarios contractor companies face when pitting closure against dormancy. Either it’s a case of ‘my company is insolvent’ or it’s a case of 'my company is solvent.' Below are some explanatory notes to each of these two main scenarios and related guidance on costs and timeframes.

1. ‘My limited company is insolvent’

First, a quick reminder from my last piece in which I outlined what being “technically insolvent” means.

It means the company has more liabilities than assets and / or it can’t pay its debts as they fall due.

Often, liquidation is a viable option to close the company when it is irrecoverably insolvent.

(N.B. There are a number of other possible insolvency processes, but they are more to do with rescuing the company and/or its business.)

Insolvent Liquidation, via a Creditors' Voluntary Liquidation (CVL), or Compulsory Liquidation (CL)

Liquidation is a formal insolvency process, which is either instigated by the directors (a CVL) or is a court-driven process initiated usually by a company's creditor(s) (a CL).

CVL

Ideally you want to remain in control of the company wind-down process and once that decision has been made, it’s time to instruct an Insolvency Practitioner (IP) to assist you with the formalities of liquidation.

Reassuringly, the IP tends to provide a lot of answers to a lot of the questions which contractors will understandably have.

In particular, with an IP on hand, you can formulate an appropriate wind-down strategy. This should provide you with the peace of mind (at a time where your actions can be subsequently scrutinised) that each step forward is now going to protect stakeholders generally, and will mitigate any alleged actions of wrongdoing. With an IP in your corner, you also have the benefit of agreeing timeframes, with a view to you obtaining certainty that the company will be liquidated on a given date.

CVL cost and timescale

Starting costs for the CVL process are usually around the £3,000+ mark (but costs can vary depending on a number of factors). With timescales, it can take as little as 10-to-14 days from initial instruction to formal commencement of liquidation.

CL

The CL process is normally instigated by a company's creditor(s).

A creditor must be owed at least £750 and provide evidence that the company cannot pay the debt -- usually because the company has not satisfied the creditor's statutory demand).

As such, CL is often (but should not be) used more as a method to invoke payment rather than having to submit an unsecured claim in a liquidation with all the other creditors

As a director, you should strive to avoid this route of being forced down a CL, and instead aim to take matters into your own hands by pursuing a far more controlled wind-down -- through a CVL.

CL cost and timescale

Compulsory liquidation is not a cheap process and can cost a creditor circa £3,000+.

It also comes with the prospect of a nil return, if the company does eventually get placed into compulsory liquidation.

Timescale-wise, from the start (normally by serving a statutory demand) to the court granting a winding-up order, a CL can take as up to three or more months.  

Dissolution or ‘Strike-off’  

The above are the two main insolvent liquidation processes to close the company. But what happens if you have no funds to liquidate or creditors are simply unwilling to pay the costs of winding up the company through the courts?

That presents a bit of a problem with no real solution other than to consider a dissolution.

By no means should this be your preferred route to close down an insolvent company; rather it ought to be more of a last resort. 

Despite misleading information online, you can actually pursue a dissolution route even if the company has unsettled creditors.

Companies House explains that the dissolution process includes informing any creditors of your intention to ‘strike-off’ the company from the register.

However, applying for dissolution when the company has creditors or any outstanding liabilities comes with real risks. And contractors need to understand these risks before deciding on this route, as one of those risks is that creditors have the power to object to the process!

Strike-off cost and timescale

If you want to undertake striking off yourself, then the cost can be as little as £8 and you can get started here with Companies House.

Using a professional adviser to explain the risks, discuss options and guide you through the process from start to finish, can range in price from £250 up to £1,000+. The final cost you’ll actually pay depends on a number of factors.   

Timescales can similarly vary, with it taking no less than three months possibly, but as long as six-to-nine months, or even longer if creditors object to the process. The risk is that some objections could result in the dissolution never happening at all.

2. ‘My limited company is solvent’

Let's now consider brighter scenarios where you find yourself considering options while either sitting on a healthy cash balance or at the helm of a company with zero liabilities.

The options here are far less complicated and much easier to follow and there are significantly fewer risks.

Members' Voluntary Liquidation (MVL)

Yes, it’s that word again 'liquidation' -- it conjures up images of leaving behind a wake of unsettle debts!

However, despite the word “liquidation” featuring in 'MVL,' the more important word to focus on is “Members,” as the meaning here is that this is a solvent liquidation with the shareholders of the company receiving any surplus of assets over liabilities and costs -- normally by way of a dividend.

The MVL scenario is an option when you are looking to cease trading; have no further use for the company now or in the future, normally have a net balance (assets over liabilities) of circa £25,000+, and you wish to extract the cash in the most tax-efficient way possible.  

For the MVL, you will need a qualified IP to act as liquidator.

MVL cost and timescale

The cost of a Members’ Voluntary Liquidation normally starts at just £1,000, or it could be £1,500 (or more) depending on a number of factors.

Timescales from liquidation to pay-out can be as fast as the same day!

But actual completion of the entire MVL process can take six months, or more sometimes -- mainly due to seeking and waiting on HMRC clearance to close the case.

Leaving your limited company dormant

In certain circumstances, you may want to simply cease trading with a view to starting up again in the future, or at the very least having the ability to do so with the existing company.

In this ‘dormancy’ scenario, all that is required is to for you to continue to fulfil your administrative obligations at Companies House, such as filing certain returns and accounts (albeit dormant ones).

Dormancy cost and timescale

The cost is zero and timescales do not apply.

Dissolution

A final option is dissolution -- which you hopefully remember from earlier on!

However, this time you have no liabilities, making the process significantly more straightforward with less risk of any personal exposure.

The dissolution option makes sense when MVL is inappropriate, and you no longer need the company going forward, now or in the future.

Dissolution cost and timescales

The cost of dissolution is £8 to carry it out yourself, or using a professional adviser it can vary -- between approx. £250 and £1000+.

The timescale is around three months, and this three months is on the basis that you undertake the process correctly and there are no creditors.

Final thoughts

When considering the rather weighty question of whether to close your company or make it dormant, you must strongly consider talking to a professional adviser. And if your limited company is insolvent, then that adviser should be a qualified Insolvency Practitioner.

The IP will be able to guide you through the risk factors, the options available and the process involved. Good luck contractors!

Find out more about SFP Group here.