Are you keen to protect the emerging brand name of your fledgeling business? Perhaps you are still in the planning stage with an eye on operating as a limited company in the future? These are just two of the situations where setting up a dormant company can make sense for a startup. So what’s involved and is it worth it? Here’s what every entrepreneur needs to know…
Dormant companies: what are we talking about?
In a nutshell, a dormant company is one that is not trading and has no accounting transactions.
In the course of setting up and running any company, business owners regularly come into contact with two public bodies: the UK’s central register of companies (Companies House) and, of course, the tax man (HMRC). There’s a subtle but important difference between the definition of a dormant company from the point of view of these two organisations:
Companies House defines a company as being dormant “where it has had no significant accounting transactions during the relevant accounting period”. The only transactions allowable for a dormant company are:
- Payment for shares taken by the subscribers to the memorandum of association.
- Certain fees paid to the Registrar of Companies: i.e. for filing annual returns, for the re-registration of a company or for a change of company name.
- Payment of a civil penalty for late filing of accounts.
Dormant companies and filing: what’s involved?
Even in the case of dormant companies directors are still required to supply certain information to Companies House each year. Failure to do so is a criminal offence and will result in a penalty and in some cases can also result in the company being struck off the register.
This Companies House guide provides detailed information on filing requirements, including links to the relevant online forms. In essence, you are required to submit the following documents each year:
- An annual return, incorporating a balance sheet and including a declaration that the company has been inactive throughout the accounting period.
- Confirmation of any new appointments/change of details of current company officers (e.g. if you add or remove a director or company secretary).
The Revenue focuses (unsurprisingly) on tax. It defines a dormant company as one that is “not active, not liable for Corporation Tax or not within the charge to Corporation Tax.” This includes new companies that haven’t started trading yet.
Dormant companies and tax
If you set up a new company but the company has not yet started trading you need to notify your local Corporation Tax Office. If you start trading you must inform HMRC within 3 months of starting your tax accounting period. This HMRC guide provides further details and links to the HMRC online registration service.
Providing filing requirements are met a company can remain dormant indefinitely.
Why form a company – and leave it dormant?
At any one time, there are an estimated 300,000 dormant companies on the register. While many are associated with businesses that are approaching the end of their natural lives, others have been set up with the deliberate intention of the company remaining dormant (for the time being, at least).
Here are the main reasons why new businesses do this:
To ‘have everything in place’
You are running your business as a sole trader or as a partnership and you see no reason to change the structure right now. You can see the benefits of operating under that “Ltd” assignation. Especially if you want to give an air of solidity to your business. And even more so, especially if it will help with attracting customers and/or if you are planning to get other people on board as investors or directors.
Forming a company at this stage gives you the option of leaving it dormant. You then have the reassurance of being able to switch over easily to trading under that company name once it feels right for your business.
To protect your name
As a sole trader, your business is gaining ground and you’re starting to get market recognition. So far, so good. But what if someone else registers a company with the same name? Worse still, even if that business is outside your niche, what happens if the internet is suddenly peppered with poor reviews for a limited company with the same name as your business?
Register the company name
Registering the company name is an effective way of getting in there first. It helps to avoid customer confusion and protects your brand. This could also be the right time to think about trademarking for full protection.
To show you mean business
Are you a safe bet for investors or recipient of bank finance? Having a dormant company in place can help to show that you are organised. It also shows that you’re thinking ahead and you’re confident of your business meeting its milestones. And that ultimately you may need to alter the structure of the business.
Is it worth it?
Filing confirmation statements (these used to be called ‘annual returns’) may sound like a time-consuming burden. However, with dormant companies, this need not be the case. Essentially, you are ‘checking in’ with Companies House each year to confirm whether anything has changed. Reminders are sent well in advance. What’s more, with WebFiling, the inbuilt checks and pre-populated data stop you from missing essential information. For more info on how this works, see our article entitled ‘Filing Dormant Company Accounts’.
So, is a dormant company something for you at this stage?
It’s worth serious consideration if you want to protect your business name. However, don’t treat this as an ‘easy alternative’ to trademarking. There’s also a lot to be said for getting everything in place well in advance of the point in time when you feel ready to trade as a company.
It can be an easy step
The good news is that, with the right help, setting up a company can be a quick and pain-free process. And better yet, without an accountant’s bill in sight. If you need more advice before making the move toward company formation, check out the articles in our help centre or get a step-by-step break-down by reading our company formation guide.