Find out what options you have
If you recognise some of them – or you realise that your business is facing insurmountable difficulties then you might be thinking about closing down your company.
Even thinking about closure is a difficult and emotional decision that ultimately comes down to several key factors.
Any of these individually could be reason for a director to consider shutting down but collectively would provide an irresistible case for liquidation.
What are these factors?
- Financial unsustainability – If the business is consistently losing money, then it will eventually run out of resources to keep it afloat. It’s nearly always better to cut your losses and move onto your next venture than continuing to pour money into a business that is unlikely to turn a profit.
- Unfavourable trading conditions – with inflation still in double digits, interest rates rising to 20-year highs and a cost of living crisis continuing to erode customers’ confidence and buying power, even the strongest businesses are operating in tightening economic circumstances. If your own market is contracting and you’re facing intense competition from businesses with more resources then it will be even more difficult to turn the situation around.
- Onto Plan Z – Every experienced director or business owner will have several strategies and plans to work through to steer their business through tricky times but sometimes none of them seems to stick. If you’ve exhausted all your options then it might be time to acknowledge that there might not be a positive solution to be found.
- Stress and wellbeing – Running a business can be stressful and take a toll on physical and mental energy and health during the best of times. When things aren’t going to plan then they will be under even more strain and can be debilitating just at the time when you need to be at peak performance most. If running your business is literally making you ill then you should actively consider some changes.
- Cashing out – Sometimes a business owner and director has a critical decision to make about raising money for personal or other business related reasons. One way to access funds could be by liquidating a business which would see assets sold off to provide the money or the business as a whole.
- Legal considerations – bear baiting, chimney sweeping and being a blacksmith used to be profitable occupations a 100 years ago but would be challenging or illegal today! The legal landscape is always changing which means that what was a profitable endeavour last week might not be ever again meaning it’s time for a change.
- Life happens – Not every decision a director has to make is because of business. New opportunities emerge that can be pursued instead or personal health or family challenges mean necessary changes. Retirement might also mean that there’s nobody to take the business forward so it has to be closed in an orderly manner.
These are only a small selection of the possible causes of a business owner or director making the difficult decision to close their company down.
If you’ve reached this conclusion then the next question is clearer but no less crucial –
How can I close a company?
There will be a lot of questions from any director contemplating closing their business but the first one to answer up front is that any limited company can close down – whether it has outstanding debts or not.
Sole traders are an exception to this rule as they have their own legal structure but there are four main routes to closure depending on whether the business is classed as solvent (can repay its debts within 12 months) or insolvent:
Insolvent methods of closure
Creditors Voluntary Liquidation (CVL)
If a business has more debt than it could reasonably expect to be able to pay off then its directors or its creditors can appoint an insolvency practitioner (liquidator) who will help them to close the business down.
Their job will be to protect the interests of the creditors primarily and will look to sell any company assets and use the money to pay back these creditors.
All legal actions such as winding up petitions brought against the company will automatically cease while the liquidator deals with creditors and their claims from day one of being appointed
Once the CVL process is complete and the business is closed, the directors are free to move onto their next professional venture without any debts accompanying them.
A compulsory liquidation which can be brought about through a winding up petition is the process where a creditor takes matters into their own hands and goes to court to force the closure of the business that owes them money.
This would mean the sale of any assets the business had so creditors would then receive a proportion of these.
This is a less favourable outcome than a CVL (or CVA for that matter) for many reasons including that a business facing a winding up petition and compulsory liquidation could see its bank accounts frozen, its suppliers increasing their terms or stopping service altogether or having their commercial leases terminated any of which could make continuing to trade as an ongoing concern practically impossible.
Also, unlike a CVL, the creditors would be in control of the process and the court will appoint an Official Receiver to oversee all matters who will also investigate the conduct of directors which, depending on the findings, could see them being fined, disqualified and/or being made personally liable for specific company debts.
Solvent methods of closure
Members Voluntary Liquidation (MVL)
A Members Voluntary Liquidation (MVL) process is when directors of a solvent company take the decision to close their business.
Even though they are solvent, it is still a legal insolvency process and therefore has to be overseen by a licensed insolvency practitioner. As well as making sure it is completed quickly and correctly, they will be able to help directors dispose of assets more quickly than they usually could themselves and get their hands on the proceeds quicker and more efficiently.
Directors who use an MVL to close their business could also be able to claim Business Asset Disposal Relief (BADR) which was previously known as Entrepreneurs Relief.
This allows directors to pay a tax rate of 10% on asset disposals rather than the higher Capital Gains Tax rate – although directors should always get advice from tax professionals on these issues.
If a business is debt free and not currently operating but its owners want to pursue new challenges they have an option to close it through a company dissolution process.
Also known as striking a business off, it’s the simple but formal action of removing the business from the Companies House register.
It’s relatively inexpensive and straightforward to close a business that isn’t trading anymore and doesn’t have a feasible immediate future but there are several specific conditions that have to be met in order for it to be legally dissolved.
Like every other insolvency process, professional advice should be sought at the earliest opportunity before embarking on any of them.
Closing a business can be the hardest decision any director can make in their career but it can also be the correct one.
Before reaching any significant choice, they should get some advice first from an impartial source.
This is why we offer a free initial consultation for any business owner or director to take advantage of at their own convenience.
One of our team of advisors will be able to outline what options are available to them based on their situation and what steps they can take next depending on what they choose to do.
They might even change their minds and be able to adopt an alternative strategy depending on their situation but only after they take the first step on their journey and get in touch.