Company closure isn’t just for insolvent companies. While it may seem counterintuitive to close a profitable company, it can be the most appropriate option depending on that company’s situation. Before you decide on a solvent liquidation over a dissolution, you should understand the differences between each process and when they would be suitable.
When should you close a solvent company?
While it might seem counterintuitive to close a solvent company, it can be the best way forward if:
- The directors are retiring without succession plans, if they don’t want to sell the company, or they want to transfer its funds to a private estate.
- The market, or the directors’ circumstances,changes to the point where they don’t wish to run the company anymore.
- The processcan be more tax-efficient and offer more financial benefits than dissolution, should the company meet the criteria.
- The company is one of several undergoing a merger.
How can you close your company if it’s solvent?
If you choose to close a solvent company, your options depend on its circumstances, mostly regarding its assets, including the amount of cash in its bank account.
Closure options for solvent companies include:
- Strike-off through dissolution
A dissolution removes the company from the Register of Companies at Companies House, ending the company’s legal existence if it meets the relevant criteria.Directors should ensure their company is solvent before applying for a dissolution. While directors of insolvent companies can apply for a dissolution, creditors are likely to object.Failing to meet the criteria means those creditors can restore the company for up to six years after the strike-off.
Those criteriaspecify that during the three months prior to strike-off:
- The company must not have an administrator or receiver in office.
- The company cannot be subject to prosecution or disqualification.
- The pension scheme must be finalised.
- It cannot have undergone a name change.
- It must have stopped trading.
- It can’t have disposed of stock.
- A solvent liquidation process
If the company has more than £25,000 in cash and assets, then it may be more tax-efficient to close it through a solvent Members Voluntary Liquidation (MVL). The company is formally closed by a licensed and regulated insolvency practitioner. They will review your company’s circumstances, advise you whether a solvent liquidation would be suitable, and how you can prepare your company for the process.
What are the benefits of a solvent liquidation?
MVLs have several advantages over dissolution.
- Formal closure
As a liquidation is a formal process, it is carried out by a licensed and regulated insolvency practitioner. These professionals are the only ones who can legally carry out a liquidation procedure, with the company woundup and closed upon the process’s conclusion. - Quick distribution of funds
Depending on shareholders’ indemnity, the insolvency practitioner might not even need to wait for H.M. Revenue & Customs to grant clearance to release the funds. - Various tax advantages
Closing the company via an MVL can offer various tax benefits over dissolution. Specifically, if the company has sufficient assets, an MVL can reduce the amount of Capital Gains Tax that the company has to pay through Business Asset Disposal Relief (BADR). Even though the rate of BADR frequently changes, which may affect the specific amount, it can still benefit you as the company’sdirector, and its other shareholders.
To summarise
While liquidation is most often associated with insolvent companies, solvent companies can undergo the procedure in the right circumstances. It might be worth considering if you and the other directors wish to retire without succession or a plan to sell, if you just don’t want to run the company anymore due to changing circumstances, or if it has sufficient assets to benefit from Business Asset Disposal Relief.
Speaking to a licensed and regulated insolvency practitioner will help clarify which solution is most appropriate. These professionals are the only people who can carry out liquidations for insolvent and solvent companies.
