Entrepreneurs know better than anyone how constantly the business landscape is changing. In the same way that new opportunities continuously present themselves, it’s common for existing ventures to run their course or simply lose their momentum. Dissolving a company is very much a part of this cycle.
So what’s the best way to draw a line under a company? Is dissolution always the best option? Here are some points to bear in mind when considering the way forward…
Dissolving a company: recognising when to take action
Business owners decide to bring their companies to an end for lots of different reasons. For instance, the business itself may be viable, but you may have taken the decision to retire from it or perhaps to focus on a completely new area. In other situations, a long hard look at the market may cause you to reassess the future prospects of the venture and start planning an exit strategy. There are also those cases where the decision is forced upon you, a change in your personal circumstances, a hike in your operating costs or a sudden downturn caused by the loss of a big contract.
Especially where you sense the market has moved against you, it’s important to recognise the consequences of that shift and start considering your options. You should keep a close eye on the following:
- Financial forecasting: does your sales pipeline tell you that your market is about to dry up?
- Profit margin: are you working as hard as ever, but for a much lower return?
- Expenses vs. income: can spiralling expenses be managed, or are they unavoidable?
- Servicing your long-term debts: is the burden of capital and interest repayments becoming unsustainable?
Thinking of ‘riding it out’? Consider the implications…
Most businesses experience the occasional dry patch. So why not simply tighten the reins on spending, extend your credit lines and attempt to trade your way out of trouble?
The danger here is that you drift into insolvency and do nothing to cut your losses, leaving you open to allegations of wrongful trading. An insolvent company is one that has no reasonable prospect of being able to meet its obligations.
Wrongful trading laws are designed to make directors stop and think. They are to get them to take every reasonable step to preserve what’s left of their company’s assets, so that creditors have at least some chance of being able to recover what’s owed.
There are two very good reasons why avoiding a finding of wrongful trading should be on top of your list of priorities:
- You can be banned from being a company director for up to 15 years, something that’s of particular relevance if you anticipate getting involved in another business project in the future.
- You can be held personally liable for the company’s debts that have accrued as a result of this ‘wrongful’ trading.
Not all cases of insolvent trading will give rise to allegations of wrongful trading, but there’s often a fine line between the two, so it’s paramount you recognise the warning signs and take expert professional advice when they become apparent. As a start, consider an accountant with experience in helping small businesses. He or she should be able to assess where you’re at and refer you to a specialist insolvency practitioner if necessary.
Dissolution: which option is right for my company?
There isn’t a one-size-fits-all approach to dissolving a company. The way forward will depend on whether you’re still technically solvent, your reasons for bringing it to an end, the preferences of others with an interest in your company and/or tax planning considerations. Will liquidation be necessary, and what is the difference between that and dissolution? To give you an idea of the different processes, here are some examples of how dissolution may be handled:
You simply want to move on…
Maybe it’s for reasons of retirement or perhaps you want to focus your efforts on something new. If the business is still viable, the obvious starting point is to have it valued and consider selling it as a going concern. If this isn’t an option, one way forward is to apply to Companies House for the dissolution (striking off) of your company. For this, your company must be solvent and you must not have traded in the three months prior to applying. Once the company is dissolved any assets still resting with it will go to the Crown. So before you apply, make sure you ‘get your house in order’ by paying off creditors, and selling company property and equipment before extracting the company’s assets.
This process is relatively quick and inexpensive (the admin fee for striking off is just £10). Don’t skimp on advice when it comes to extracting the assets of your company in the most tax-efficient way possible. Where the affairs of your business are complex, where the value of the company’s assets exceed £25,000 and/or where you’re a higher rate taxpayer, it may be preferable to opt for what is called ‘members’ voluntary liquidation’ (MVL), where a company is able to pay its debts, but at least three quarters of the company’s members want to dissolve it anyway.
Your idea never really got off the ground…
You set up a company that didn’t get the backing you hoped for. Dissolution here is an option, but is this really the end of the line for your product? If there’s a chance it could be resurrected consider keeping the company as dormant. This is because restoring a dissolved company can be a costly process. In contrast, a dormant company can be kept going indefinitely. This is so long as you file an annual return and company accounts each year. Because nothing is happening with the company while it’s dormant, these reporting requirements are extremely straightforward. You are essentially providing the same information from one year to the next. When a company is dissolved someone else can open a company with that name: while it’s dormant the name remains yours.
Future challenges are on the horizon…
You are still solvent, but you recognise that now’s the time to call it a day. Especially if there are high-value company assets to deal with. This is as well as/or if your company has multiple directors/members, members’ voluntary liquidation may be appropriate. A liquidator (i.e. a licensed insolvency practitioner) must be appointed. This can make this a more expensive option than with a strike off. One big difference is that all distributions to company members (not just the first £25,000) are treated as capital rather than income. This means that, for higher rate income taxpayers, liquidation can often make better financial sense than applying for dissolution.
Pressure from creditors is mounting up…
If you’ve reached the point of insolvency, do you wait for the final demands to culminate in a court order? Or do you try and take initiative yourself to sort things out? You’ll probably be advised to opt for a creditors’ voluntary liquidation (CVL). A liquidator is appointed to stem the tide of losses. Then, your remaining assets are distributed to creditors in order of priority.
Looking to the future…
Finally, some good news if current pressures are weighing you down. Remember that corporate insolvency will not affect your personal credit rating. It’s also a myth that going through a liquidation procedure prohibits you from securing bank funding in the future. Banks look at applications on their own merits. Although your past business ventures are a factor to consider they’re not the ‘be all and end all’. If entrepreneurs were barred from starting businesses on the basis of past unsuccessful ventures the wheels of commerce would have long since stopped turning.
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