The pros and cons of closing a limited company
They could be short term but terminal factors such as not being able to open due to Covid-19 restrictions, or suppliers going out of business and owing them money or essential stock that can’t be sourced elsewhere.
There might be more historic negative circumstances involved such as longer term debt that has grown and can’t be realistically paid off or it might just be the end of a company’s natural life cycle.
Whatever the trigger – once the decision to close down a limited company has been taken, the most important consideration is how it should be done.
What is the most efficient, effective and stress free way possible to close down a business?
There are several methods available but each comes with its own pros and cons – advantages that can save a company time and money or disadvantages that could be potentially disqualifying and could even see directors pursuing them in legal trouble themselves.
In this blog, we’ll look at what they are.
Also known as striking off, dissolution is the formal legal action of closing a company.
Once completed, the business will cease to exist as a legal entity and it is officially removed from the Companies House register.
- The cheapest method of closing a business – filing costs £10
- Directors can manage the process themselves – don’t need an insolvency practitioner to oversee matters or automatically investigate directors conduct
- Relatively straightforward to fully complete
- The business must be debt free to dissolve or be struck off
- Can be easily objected to by creditors, staff or other directors if they have relevant concerns
- Company can be resurrected up to six years after dissolution if it shouldn’t have been struck off so creditors can resume their claims against it
- Directors can be held personally liable for outstanding company debts
A member’s voluntary liquidation or MVL is a voluntary process of closing down a business that is initiated by the shareholders or directors of a solvent company.
- The easiest and quickest way to close down a solvent company – can take ten days or less. Especially useful for contractors or other one-person businesses
- Most tax efficient way of closing a company; able to make use of Business Asset Disposal Relief (BADR – previously known as entrepreneur’s relief) which could see significant savings
- Can only be used by solvent companies
- Creditors have to be paid in full within 12 months
- Legal process so has to be overseen by an insolvency practitioner rather than directors themselves
Creditors voluntary liquidation (CVL) is when directors decide to close the business because it has accumulated too much debt and doesn’t have any realistic way to pay it off.
- Business with debts can close down or liquidate using a CVL including those with bounce back loans or CBILS borrowing
- All creditor actions such as winding up petitions or bailiff appointments are halted
- Directors can purchase business assets after liquidation including the business name, premises, IP and other elements
- Company can be placed into liquidation in as little as two weeks
- Creditors interests remain paramount – they ultimately decide the best closure option and can oppose the CVL option
- Directors are investigated and if any illegal or unethical behaviour is uncovered then disqualification can likely follow
- The final solution for any business – it closes for good
When a business is forced to close by creditors using a court-approved, winding-up petition, this is known as a compulsory liquidation.
- The business will formally be closed
- The cheapest method of liquidating as the petitioning creditor pays via the court. Very much a last resort for creditors as they believe the business has no prospect of paying debts
- Directors can pay the debt associated with the winding up petition in order to dismiss it
- Debt collectors and bailiffs can be busy chasing the business for payment so can be stressful and unpleasant
- A court appointed officer – the official receiver – will administer the process so the directors will have no control or input into the process at all
- The company bank account will be frozen and the liquidation will be publicly announced via the Gazette so other creditors will know
- All employees contracts are terminated once a winding up order is made
- Directors conduct will be investigated with potential disqualifications and could potentially be made personally liable for debts
Sometimes the hardest part of closing a limited company is deciding that this is what has to happen to the business.
Once that decision has ultimately been reached, the method of closure will usually be dictated by the financial circumstances the business finds itself in but sometimes there is some leeway.
The best thing to do if you’re considering these options is to get in touch with us first.
After we’ve got a full picture of your circumstances we’ll be able to let you know the optimal course of action for you and your business and if we’re lucky enough, be happy to guide you through the process you decide to follow.