This second blog looks at how you can close down your limited company if you have decided that trading is no longer viable.
There are 2 ways you can close your company if the company is solvent (ie is able to pay its debts).
- Applying to have the company struck off at Companies House
- Member’s Voluntary Liquidation (MVL)
The preferred option will depend on how much money there is to extract from the company and whether from a tax perspective you want that money taxed as dividends or capital.
Lots of jargon there to get your head around so let’s try to explain the difference.
Dividend or Capital Treatment?
When you take money out of your limited company – you pay tax on it. You could take the money out as dividends, as you probably have done over the years you have had a limited company, and if you do this you will be taxed as normal as having received dividends from your company. Dividends are taxed at your highest marginal tax rate, so either at 7.5% or 32.5% depending on your other income in the year.
When you close the company though – the final payment to you can be treated as you selling your shares in the company and this is the “capital” option. This money is still taxed, but it is taxed under capital gains tax rules rather than income tax rules and you are treated as having made a capital gain on your shares. You may have bought your 100 shares in your company when you set it up for £100, and now you are selling them for £x. The difference is a capital gain.
You may prefer to take this treatment for 2 reasons:
- Everyone has a capital gain annual exemption (currently £12,300) so you will not pay tax on the first £12,300 of your gain. If there are 2 shareholders in the company, then each will have their own exempt amount.
- If your gain is more than your annual exemption, it is possibly that you will only pay tax at 10% on the rest of the gain, due to another tax break called Business Asset Disposal Relief (AKA entrepreneur’s relief)
The “capital” route is often therefore the preferred option as potentially being more tax efficient.
Striking off or MVL?
So what is the difference between the 2 options and why would I choose one over the other?
Striking off is the simplest option.
However, this option is only available if:
- The company has not traded in the last 3 months
- The company has not been threatened with liquidation
- It has no formal agreements with its creditors – eg a creditors voluntary arrangement
The company will also only be able to get the “capital” treatment above, where it wants to extract funds of less than £25,000.
The striking off process itself is fairly simple – you apply to Companies House who will then publish a notice that you applied to be struck off. After 2 months, if there have been no objections then the company will cease to exist.
You also have to inform anyone who maybe affected by the company’s closure (employees, debtors etc) within 7 days of sending the notice in.
It should also be noted that the directors can be held personally liable if they apply to strike off a company without paying off all its debts.
Members Voluntary Liquidation:
A MVL can be used where it is beneficial to have capital treatment, but you need to extract more than £25,000 on closure.
You need to appoint a formal liquidator to complete this process for you which will incur costs. However, it may well be that the tax benefits outweigh the costs.
To complete a MVL, the directors must make a declaration of solvency, stating that the company is able to pay all its debts.
The liquidator takes control of the winding up of the company, at which point the directors cease being able to act on behalf of the company.
What if the company is Insolvent?
If the company is insolvent (eg it cannot pay all its bills) – then you cannot use the 2 options above.
You will need to appoint a liquidator to assist with closing down the company and put it into liquidation. In this situation the interests of the creditor rank above those of the directors and shareholders – eg any money that is available will go to pay HMRC and your other creditors before repaying you any money you have put into the company.
Liquidating a company is a complex process and as such, generally is not a cheap option either, which is incredibly hard when the reason you are closing the company is that it is struggling.
It is always a good idea to take professional advice before you get to this position, who will be able to help you with any other options that may be available.
Closing a limited company is therefore more complicated and more expensive than closing a sole trader business. This blog only aims to give you an overview of the options available to you.
You need to take professional advice if you are thinking about closing your company to ensure it is done properly and in the best way to suit your individual needs.