Closing a company with retained profits

Shaun Barton

Shaun Barton | Company Closure Expert

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Closing a company with retained profits

Retained profits are those held within the business after dividends have been paid to shareholders. They represent money that’s available to the business for growth purposes or as a ‘cushion’ in times of financial instability.

If you’re thinking of closing your company and it has retained profits, it’s important to choose the right closure method as you could overlook significant tax advantages. Retained profits can amount to a significant sum, which is why closing the company in the right way optimises the amount you’re able to extract.

The two options for closing a company with retained profits are Members’ Voluntary Liquidation (MVL) and voluntary dissolution. The value of your retained profits and the nature of your business affairs is the key to choosing between them.

What is Members’ Voluntary Liquidation?

Members’ Voluntary Liquidation is likely to be the best option to close the company if it has £25,000 or more in retained profits. MVL is a formal closure procedure that can only be conducted by a licensed insolvency practitioner (IP).

The procedure does attract professional fees but the benefits of an MVL far outweigh the cost given its tax-efficiencies. This is because distributions are subject to Capital Gains Tax (CGT) rather than income tax.

If you’re eligible to claim Business Asset Disposal Relief you could further reduce your tax liability to an effective rate of 10 per cent. It’s worth noting here that if your company is insolvent – perhaps unexpectedly due to contingent liabilities materialising – a different formal procedure called Creditors’ Voluntary Liquidation (CVL) must be pursued.

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What is voluntary dissolution?

For companies with a lower level of retained profits and straightforward business affairs, voluntary dissolution, also known as voluntary strike-off, provides a more suitable alternative.

Voluntary strike-off is an inexpensive way to close a company yourself, costing only £10. In this case, you wind down the business’s affairs yourself and apply to Companies House to have the company removed from the register.

Profits are extracted by way of a dividend in this case, or via your director’s salary. If you have substantial retained profits, however, it’s important to note that this is far less tax efficient than the Members’ Voluntary Liquidation process.

Need to speak to someone?

With multiple offices across the UK and a vastly experienced team of business closure experts, you are never far away from the advice you need. Our Licensed insolvency practitioners provide free consultations to all directors and shareholders, and can quickly ascertain which closure method is best for your business.

We are licensed by recognised professional bodies and have helped thousands of directors over many years. Contact us today for your free company closure consultation.

Considerations when closing a business with retained profits

  • Do your company reserves amount to £25,000 or more?
  • Are your business affairs complex or relatively straightforward?
  • Has your company traded for 12 months or more
  • What are your plans for the future – do you intend to carry out a similar trade under a new company name within the next two years?
  • Is there any doubt that your company is solvent?
  • Have you sought professional advice from a licensed insolvency practitioner?

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Obtaining professional advice

A key factor when deciding how to close a company that has retained profits is tax efficiency. It’s always important to obtain professional guidance when you close a business, particularly when there may be considerable tax advantages available to you.

Company Closure will ensure that you close your company the correct way, bearing in mind its levels of retained profits and other factors. We have extensive experience in helping directors to close their companies safely, and will quickly determine the most appropriate path.

Please get in touch to arrange a free, same-day consultation – we operate a broad network of offices around the UK so you’re never far away from professional support.

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