Dissolving a company – what you need to know

Every year, hundreds of thousands of businesses are being dissolved in the UK. In 2018 to 2019, 508,865 companies were terminated in the country. The reasons for dissolution may vary, but company owners must follow a similar procedure.

Depending on the size of your business, dissolution may be a relatively quick affair, but the larger the company, the longer it may take. In certain cases, deregistering may also not be your best solution. We’ll explore the individual steps to end a business to help you minimise stress during this difficult time.

Sometimes businesses come to an end and must stop operating permanently. In that case, owners must dissolve their company. But going out of business is not the only reason why companies dissolve. Other possible reasons include:

• Moving the company to another country
• Selling parts or all of the business
• Mergers
• Legal succession

If you’re moving your business to a different country, you generally have four options:

• Dissolve the existing company and relaunch it in another country.
• Allow another company in a different country to purchase your company’s assets and dissolve your company.
• Merge your company with a new business before dissolution.
• Launch a second branch overseas and keep your existing company in the UK. This is a common option taken by larger businesses.

Much like registering a business with the HMRC, dissolution involves telling the relevant authorities about your change in circumstances. You will be required to strike off your LLC, limited liability partnership (LLP), community interest company (CIC) or charitable incorporated organisation (CIO) from the Companies House register. Once a name is removed from the register, the company does not legally exist anymore.

However, before you file the relevant documentation you must consult relevant parties depending on the legal structure of your business. For example, LLCs need to approve a dissolution with their members. The exact voting procedures will be outlined in your operating agreement.

If everyone agrees, you should tell creditors about the closure of the business and allow enough time for them to make final claims.

There are a few other conditions companies must meet before dissolving in the UK:

• They cannot have continued trading or traded stocks within three months before dissolution.
• They cannot have legally changed their name within three months before terminating the business.
• They have not already initiated administration proceedings or put a company voluntary agreement in place.

Companies that do not meet these requirements must opt for voluntary liquidation instead.

Once approved, a LLCs and CICs will be required to file a DS01 form with HMRC. The form can be submitted online and must be signed by all directors of a company. Employees, shareholders and creditors will receive a copy. If there are no objections, a company can be dissolved within three months after it has been announced in the UK’s official public record – The Gazette.

Limited liability partnerships need to fill in a LL DS01 form and charities and CIOs must apply online to be removed from the charities register.

There are no specific times of the year (for example, the beginning of a new tax year) when you should file for dissolution. That means you can dissolve your company at any point during the year.

To get a better idea of the steps involved in ending a business, let’s look at an example of a LLC based in England.

Let’s assume you are closing a LLC in the UK. You must follow these steps:

• Ensure you meet the conditions for strike-off before you apply.
• Seek approval for the decision to dissolve the company from a majority of its members. Follow procedures set out in your operating agreement.
• Notify your creditors.
• Wrap up the LLC’s business by cancelling your local business licence or other permits and collect any monies outstanding.
• File and pay final employee tax returns.
• File all outstanding tax returns and pay corporation tax, PAYE and National Insurance contributions.
• Distribute remaining assets among members.
• File a DS01, LL DS01 or withdraw your charity via the HMRC website.
• File tax returns for the final year and let HMRC about the change in circumstances.

The cost to strike off a company from the Companies House register is £10. The form must be returned to Companies House in Cardiff, Edinburgh or Belfast – depending on your location – or can be submitted online. But there are many other costs you should consider including legal fees to settle outstanding lawsuits. You may also have to settle outstanding bonuses for employees or pay fees to wrap up other business processes.

If directors change their minds about the dissolution of their company, they can withdraw the application to strike it off. In this case, they must fill in a

DS02 form

. You must withdraw your original application if you do not meet the conditions for withdrawal set out above or are legally required to. It’s deemed an offence to not withdraw an application for dissolution in such cases.

If you’re looking to end operation of a small business, the procedure to dissolve is the same. Whether your business is a one-man LLC or two-person partnership, you will need to follow the steps above. However, for sole traders, the dissolution process is a lot quicker because unless you have employees you won’t need to file any forms. In other words, dissolving a small business can be as quick as setting it up.

Sometimes you may not want to fully terminate your company. If, for example, you think there may be a chance that you could return to a business in a few years’ time, your business could become dormant instead. This makes sense where you aren’t certain that complete dissolution makes sense or you have to temporarily take an absence of leave due to sickness. The advantages of registering a company as dormant include fewer filing responsibilities and you won’t need to pay Corporation Tax.

HMRC considers companies as dormant if:

• They are new and haven’t been trading yet
• Shell companies
• Companies set up that will never trade (for example, intellectual property ownership)
• A company that is no longer trading

Make sure you settle all bills, debt and outstanding payments before you register to become dormant. You should also cancel long-term contracts if you don’t plan on fulfilling them. You do not need to tell Companies House that your business is dormant.

Remember to file a final tax return for your business if you have decided to terminate operation.

You should also cancel the following contracts as soon as your business ceases operation. Some contracts will have a termination and notice period, so make sure you check the small print and leave enough time for them to be cancelled.

• Rental contracts
• Energy supplier
• Insurance (public liability, accident insurance)
• Phone and Internet contracts
• Customer and delivery contracts
• Advertising and marketing contracts
• Bank accounts
• Mandates

Please note the legal disclaimer relating to this article.