Closing a Limited Company
A limited company that is no longer needed can be closed down, this process is also known as winding up or dissolution. The decision to close a company may be due to lack of profitability, or retirement of the owner. It is important to understand the steps involved in closing down a limited company to ensure that all legal and financial obligations are met.
Members Voluntary Liquidation (MVL)
The main tax efficient way of closing a limited company is Members Voluntary Liquidation (MVL). MVL enables shareholders to appoint a liquidator who will formally close down a solvent company. The MVL process should be implemented when a solvent company needs to be wound up if it has come to the end of its useful life.
- Extract the reserved funds of the business in cash using MVL. Pay only 10% tax and also use CGT allowances.
- The process is very quick – can be completed within weeks.
Tax Efficiency and Cost Considerations
- CGT Advantages: One of the major benefits of using an MVL is that it utilises Entrepreneurs’ Relief.
- Cost of Closing Down: The costs of closing a limited company, and likewise the different actions and steps you need to take will depend on if your company is solvent or insolvent.
- Tax-efficient Closure Methods: Formal Strike-Off is advisable when the retained earnings from your business are lesser than £25,000.
Liquidation vs Strike Off
- Tax Implications: When striking a company off, any company funds paid out to the shareholders would be taxed as a dividend, whereas those paid out as part of a liquidation were subject to capital gains tax (CGT).
Closing a Never-Traded Limited Company
To close a limited company that has never traded, you will need to:
- Seek agreement from all directors and shareholders of the limited company.
- Decide to dissolve the company.
- Take actions to alert relevant governmental bodies, file final tax returns, and inform creditors.
Tax Considerations and Business Shutdown
- Tax-efficient Closure: Closing your company using an MVL could be the most efficient option for you: Extract the reserved funds of the business in cash. Pay only 10% tax and also use CGT allowances.
- Tax Obligations: When closing a limited company, there are several taxes to consider, depending on whether the company is profitable or not. The most common tax liabilities if the company is profitable are corporation tax and capital gains tax.
Closure Process
- Challenges: Closing a limited company can be challenging compared to the formation process.
- Company Closure with Trading History: The process of closing a limited company that has never traded is slightly more straightforward than a trading company.
Insolvency and Business Shutdown
- Insolvency: If a company can’t pay its bills (‘insolvent’), the interests of creditors legally come before those of the directors or shareholders.
- Closure Methods: Two main ways to close down a Limited Company are Strike off and Liquidation.
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