How to Close a Business: Things to Consider

According to the ONS (Office for National Statistics), 100,835 businesses were closed in the UK in the third quarter of 2021. That was 50% higher compared to the third quarter of 2020. If you’re interested in how to close a business, you’re at the right place.

Reasons why entrepreneurs may close their companies vary. Sometimes, they need to start a new venture. If you’re considering a business closure because your company has failed, remember the quote from American businessman and author Robert T. Kiyosaki, “Failure defeats losers, failure inspires winners.” So be a winner. Focus on lessons learnt and move forward. 

How to Close a Business

Entrepreneurs open and close businesses due to different reasons. For example, situations like the one caused by COVID-19 can make entrepreneurs shut their companies’ doors. Some closed their doors temporarily during the last two years, others permanently. The main reason was the lack of cash to overcome the COVID-related financial challenges and stay afloat. 

Closing a business is often a multi-step process requiring you to put aside emotion and use rational thinking. So how to close a company?

Make Sure Your Business Is Eligible to Close

To close your company, you must be sure it meets the requirements put forward by Companies House. The latter is an executive agency sponsored by the Department for Business, Energy, and Industrial Strategy. These requirements include the following:

  • You haven’t traded in the last three months
  • You haven’t changed the name of the business over the previous three months
  • There is no liquidation threat
  • You don’t have any agreements with creditors

If you comply with the requirements, you can proceed with a voluntary closing. Otherwise, it’d help if you liquidated your business instead.

To begin the closing process, you should apply to Companies House by filling out and sending off Form DS01. Then, you’ll need to remove your company from the Companies House register. This process is called “dissolution” or “striking off.” Once the name is removed from the official register held at Companies House, the company will no longer legally exist.

Plan a Closing Strategy 

Your closing strategy should include deadlines for each step. These steps may include contacting the accountant, collecting overdue payments, closing customer accounts, contacting the suppliers and the landlord, notifying insurance, and consulting the shareholders and your staff.  

Talk to All Decision-Makers and Your Staff

If you’re running a sole proprietorship, or if you’re the only owner of the LLC (limited liability company), you can make the closing decision yourself. What if you have partners or investors? In this case, you must talk to them about your decision and then initiate the closure process outlined in your written agreements. What’s more, you should tell your employees about the closure as soon as possible. 

Sort Out Your Business Assets 

You should act differently depending on whether your company is solvent or insolvent. Solvency means the company can pay its liabilities, and creditors aren’t initiating legal action against the company. Insolvency means the company has insufficient funds, bears more liabilities than it has in assets, or is facing pressure from creditors.

You can use Inventory Liquidation for a solvent company by selling off the inventory. Consider turning to an Inventory Liquidator, a company specialising in buying businesses’ excess inventory. Another option is to share the business assets between shareholders before your company is struck off the register.

You won’t have the option to sell off the inventory for an insolvent company since you’re likely to go through Compulsory Liquidation (WUC). The latter is also called forced liquidation or compulsory winding up. This is a formal insolvency procedure that forcibly shuts down an insolvent company. Typically, outstanding creditors initiate this process through a Winding Up Petition (WUP) court order.

Tell Her Majesty’s Revenue and Customs (HMRC) 

Let HMRC, the tax authority of the UK, know that you’re no longer an employer to halt PAYE. PAYE is H.M. Revenue and Customs’ system collecting Income Tax and National Insurance from employment.

Importantly, you must consult your staff when making redundancies. If you make 20 to 99 redundancies, you have at least 30 days for collective consultation, and if you plan 100 or more redundancies, you have at least 45 days.

Don’t Forget About Your Bank Accounts 

Before shutting down your business, make sure to move your funds from your company bank accounts. If you fail to do so before your business is struck off the register, the remaining funds and assets will go to the Crown.

Leave Everything Neat and Tidy with HMRC

When running a business, you must register it for value-added tax (VAT) with HMRC if its VAT taxable turnover is more than £85,000. VAT taxable turnover represents the overall value of everything you sell that isn’t exempt from VAT. When closing down, you must cancel your VAT registration, which you can do via your online VAT account. 

Moreover, close down your payroll scheme. Specifically, this means dismissing your employees (including yourself) and giving them a P45. P45 shows the tax amount you’ve already paid on your salary in the tax year. Then, send HMRC a final payroll return. 

You can notify HMRC of your subcontractors under the Construction Industry Scheme by phone. Also called the CIS, Construction Industry Scheme is an initiative enforced by HMRC to protect construction workers from false employment and bring tax evasion to a minimum in the construction industry.

Closing a Sole Trader Business UK

Are you a sole trader? Being a sole trader means you and your business are the same legal entity. So, if your business is insolvent, you’ll be held personally liable for any business debts. You must contact HMRC if you’ve decided to stop being self-employed.

How to Close a Limited Company

If your company is solvent, you can opt for Members’ Voluntary Liquidation (MVL). This is the most tax-efficient method that the majority of directors prefer. This option can be good if you’re planning to retire or want to stop running the family business. In this case, shareholders can obtain your company’s value and avoid the income tax and capital gains tax charges.

Dormancy is another option to use. A limited company is considered dormant when it doesn’t carry out any business activity or has generated no income for a while. In this case, you must pay the corporation tax in full and submit an annual confirmation statement, annual accounts, and dormancy statements to HMRC.

What if you’re closing an insolvent company? You can use the Creditors’ Voluntary Liquidation (CVL) as an option if you can’t pay bills or when your company’s liabilities exceed its assets. In this case, you must involve your creditors in the process. Also, a director must be appointed. 

Once the closing decision has been made, Companies House must receive the resolution within 15 days. Also, the resolution must be posted on The Gazette within two weeks. Moreover, an authorised liquidator must be appointed. 

Additionally, you can also go through the above-mentioned Compulsory Liquidation if your company can’t pay its debts. 

How Much Does It Cost to Close a Limited Company?

Closing Ltd company also means paying some money. Apart from paying outstanding debts and wages, you’ll also face various administrative costs. Specifically: 

  • A solvent company closure is usually the cheapest way to close a limited company. Companies House will charge you a £10 disbursement fee.
  • If you’ve chosen Members’ Voluntary Liquidation, you must pay the liquidator’s fee. It ranges from upwards of £1500 plus VAT. The total amount varies due to the complexity of the liquidation process.
  • Creditors’ Voluntary Liquidation is associated with about £3,000 to £7,000. If your company’s assets aren’t enough to cover the fees, the directors will bear personal liability for the costs.
  • If you’re dealing with Compulsory Liquidation forced by creditors or HMRC, the court fee for filing a compulsory liquidation petition is £280 as of 2020. A creditor will be charged a deposit of £1,600 to the Official Receiver (OR). An OR is an officer of the Insolvency Service of the UK, an officer of the court. The petition itself costs £400-£800.

If you need additional funds when closing your business or launching a new one, consider working with a reputable business-funding provider in the UK, e.g., a quick payday loan. Traditional loans can be tricky and come with stringent requirements. You can enjoy more flexibility and faster application processes with an online payday loan.

Can I Close My Limited Company and Open a New One

Even if you’ve decided to close your old business, this isn’t the end of the world. In today’s increasingly digital world, there is more than one online business opportunity that you can use to your advantage. For example, you can become a tutor and deliver classes online, work as a freelancer, or sell items on eBay or other eCommerce platforms.

You can close your old business and start a new one by issuing an application to Companies House. Here are factors to consider: 

  • Based on Section 216 of the Insolvency Act 1986, you can’t use the same name or even something similar if you close your old company via compulsory liquidation. 
  • If HMRC finds a risk associated with your new company paying its tax on time, it may request a security deposit, e.g., a fixed security payment or a bond. 
  • If your old company didn’t have a good credit history and wasn’t on good terms with its creditors, the new one will have a difficult time obtaining a credit account. You may be required to provide extra security, such as advance payment, or face tighter terms. 

Finally, even if you close your business, you can still buy private health insurance in the UK. Private health insurance works as an additional insurance on top of your free public health insurance through the publicly-funded healthcare system NHS (National Health Service). Many essential services aren’t available through the free primary healthcare offered through the Health and Social Care (HSC) department. 

Sum Up

Business closure is a stressful procedure. However, equipped with proper knowledge, you can figure out how to close a business without facing hurdles. To close your company, you’ll need to take certain steps: find out if it’s eligible to close, write down a closing strategy, consult all decision-makers and your employees, arrange your business assets, tell HMRC about your decision, move funds from your company bank accounts, and make sure everything is in apple-pie order with HMRC.