Running a business can be incredibly rewarding but at some point, owners will come to a stage where they no longer want to keep trading. This could be due to financial, operational or strategic reasons. When they reach this point there are several decisions and actions that need to be taken.
Why does a business close?
There are a number or reasons why a business will close:
- Insolvency – occurs when a company fails to make payments when due and are no longer financially viable.
- No profitability – when sales are in decline and no funds are available to meet all ongoing financial commitments.
- Retirement – if an owner reaches retirement age with nobody to take over the business, then it will naturally have to close.
- Market changes – economic conditions, rise in competition and technological changes can all have a negative impact on business performance.
- Personal issues – ill health, changes in financial commitment or changes in lifestyle can lead to the closure of a business.
Closing a business is a significant decision that requires careful consideration of the company’s financial health, liabilities, and the best path forward. If a business is no longer viable and a decision is made to close the operation, then a choice needs to be made on either dissolution or liquidation.
Business Dissolution
Dissolution is a formal process where a company is removed from the Companies House register. Also known as “striking off” it effectively is the end of its existence. This option will be selected then the company has no outstanding debts or legal disputes.
Key points of note are:
- It is a voluntary decision made by all the company directors.
- The process is straightforward as no liabilities are involved.
- Closure can only happen if the business has not traded or had assets sold within a 3-month period.
Conditions that apply are:
- All debts, liabilities and taxes must have been settled in full.
- The business cannot be involved in any ongoing legal proceedings.
- All creditors and HMRC must be notified of the decision to dissolve.
The process for closing a business is:
- All the board give their approval for the closure.
- All interested parties must be informed, this includes HMRC, employees, creditors and shareholders.
- The business must have stopped trading for at least 3 months.
- Submit a DS01 form to the Companies House.
- Companies house will publish a notice of intent to close, and no objections should be received within 2 months.
- All HMRC obligations including payment of final taxes (VAT, corporation tax and PAYE) must be settled.
- The business is closed.
Business Liquidation
Liquidation is the closure of a company by the selling of its assets to pay creditors. This will occur when the company is insolvent, e.g. unable to pay its outstanding debt. It can also be used for solvent companies who can distribute its assets before closure.
There are 3 types of liquidation options:
- Creditors voluntary liquidation – initiated by directors where an insolvency practitioner is appointed to liquidate the company and pay off creditors
- Compulsory liquidation – forced by a court order as a result of a request from a creditor who has petitioned to close the business due to unpaid debts. The court will appoint a liquidator to complete the process.
- Members voluntary liquidation – shareholders take the decision to close the business and return all available capital to the shareholders.
Key points of note are:
- It is a complex process and appointing a licenced insolvency practitioner is always recommended.
- Liquidation is either a voluntary or a forced process.
- Assets are sold and money received is used to pay all creditors and any remaining funds are distributed to the shareholders.
- Once liquidation is completed the business is removed from all registrations.
The process for closing a business is:
- Consult with a licensed insolvency practitioner.
- Appoint a practitioner to take control of the company.
- The practitioner will draw up a statement of affairs to outline the company’s assets and liabilities.
- Liquidator will sell the company assets and pay off creditors.
- A report is prepared for all creditors who can vote on their acceptance of the liquidation
- As soon as all assets are liquidated, debts settled and reports files the company is struck off the register at Companies House.
- The business is closed.
When closing a business, it is always advisable to seek professional advice to ensure you follow the right legal channels and comply with all necessary regulations.
If you have any questions or would like to discuss any aspects of closing a business, please call our team on 01173 700 079 or e-mail hello@steppingstonesaccountancy.co.uk.
You can also book a free 20-minute call with Yarka – https://calendly.com/yarka-ssa/20min