How do I close a company?

When you’re ready to close a limited company, there are four main methods you can use. The right option for you will depend on the business’s financial health and the amount of profit it has to distribute to its shareholders.

Choosing the right closure method will help to minimise the tax you pay. It will also reduce the risk of adverse consequences that could affect you personally. 

So, if you’re wondering ‘how do I close a company’, read on to discover the options available, including when they’re suitable, what they involve and their pros and cons.

Option 1 – Voluntary Strike Off

Who is it for? 

Voluntary Strike Off is a cost-effective closure method for small, debt-free companies with less than £25,000 in profit, as profits up to that amount are subject to Capital Gains Tax. If profits exceed £25,000, the entire amount, not just the excess, is taxed as income, typically at a higher rate. 

You can also implement the procedure yourself, so there’s no requirement to appoint a licensed Insolvency Practitioner or pay their professional fees. 

How does it work?

The process of applying for Strike Off is straightforward. You submit an application, signed by the majority of the directors, to Companies House. As long as you have completed the application correctly and there are no objections, the company will be removed from the official register after around three months. 

Before you apply, you must prepare the company for closure by ceasing trading, making employees redundant, paying any debts, filing final accounts and tax returns, and closing the company’s bank accounts. You must also sell the company’s assets or transfer them to the shareholders.

Advantages

• Strike Off is cheap – the application fee costs less than £50
• The process is quick
• It’s tax-efficient for companies with profits up to £25,000
• You may be able to claim Business Asset Disposal Relief to reduce the rate of Capital Gains Tax you pay

Disadvantages

• The company must be solvent
• It’s less tax-efficient for companies with more than £25,000 in profit
• You must prepare the company for Strike Off yourself and ensure it meets all the requirements
• You must cease trading for three months before you can apply

Option 2 – Members’ Voluntary Liquidation (MVL)

Who is it for? 

Members’ Voluntary Liquidation is a formal closure method for solvent companies. It’s best suited to businesses that can repay all their debts and have profits and assets worth more than £25,000 to distribute to the shareholders. In an MVL, you pay Capital Gains Tax (CGT), rather than Income Tax, on all profitable distributions. You may also be eligible for Business Asset Disposal Relief. 

How does it work?

In an MVL, you must appoint a licensed Insolvency Practitioner to liquidate the company on your behalf. They will sell the company’s assets and use the proceeds to settle any outstanding debts. They’ll then distribute the profits among the shareholders and remove the company from the official register. At that point, it ceases to exist. 

The MVL process typically takes three to six months for simple companies with few assets. You must pay the Insolvency Practitioner’s fee, which starts at around £1,500 but rises to £4,000 or more for more complex liquidations.

Advantages

• It’s tax-efficient for companies with over £25,000 in distributable profit
• It’s a professional process – the Insolvency Practitioner will ensure you meet all the legal, tax and administrative requirements
• You may be able to claim Business Asset Disposal Relief to reduce the rate of CGT you pay

Disadvantages

• You must pay the Insolvency Practitioner’s fee
• Even simple MVLs take three to six months to complete
• There’s more paperwork than in Strike Off, including the requirement to sign a Declaration of Solvency

Option 1 – Creditors’ Voluntary Liquidation (CVL)

Who is it for?

Creditors’ Voluntary Liquidation is a formal insolvency procedure that a director can use to voluntarily close an insolvent company. If your company has unmanageable debts and no realistic prospect of a recovery, a CVL allows you to close it in an orderly way while meeting your legal duties. 

How does it work? 

To initiate a Creditors’ Voluntary Liquidation, you must pass a board resolution that’s approved by at least 75% (by value) of the company’s creditors. You can then appoint an Insolvency Practitioner (IP). They will take control of the company and close it on your behalf. As part of the process, they will sell the company’s assets and use the proceeds to repay the company’s creditors in a strict order of priority.

Any remaining debts will ordinarily be written off when the company is closed and will not be passed on to the directors personally. You may also be able to claim director redundancy pay. The cost of a Creditors’ Voluntary Liquidation starts at around £3,000 and takes between six and 12 months. 

Advantages

• A CVL is a legally responsible way to close an insolvent company
• Unsecured debts can be written off when the company is closed
• Liquidating the company voluntarily helps to protect the directors from personal liability
• In most cases, directors are free to set up a new company

Disadvantages

• The IP’s fee is usually paid from the sale of assets, but if the assets are insufficient, you may have to pay it yourself (director redundancy pay can help here) 
• The IP will investigate your conduct and the reasons for the company’s failure as part of the process
• You can face a ban or penalties if there’s evidence of misconduct
• Creditors can pursue you for debts personally if you have signed a personal guarantee

Option 2 – Compulsory Liquidation

Who is it for?

Compulsory Liquidation is a formal procedure to liquidate an insolvent company. The creditors can initiate this process to force a company into liquidation when they have been unsuccessful in recovering money they are owed.    

How does it work? 

Creditors, such as HMRC, suppliers, lenders, and landlords, can file a Winding Up Petition with the court, typically after serving a Statutory Demand or attempting other debt collection methods. 

Once a Winding Up Petition is issued, the company has seven days to pay the debt or contest it. If it does not settle the debt, make a repayment plan or challenge it successfully, the court may decide to make a Winding Up Order to place the company into Compulsory Liquidation. A liquidator will then be appointed to sell the company’s assets, pay off the creditors as far as possible and close the company.  

Advantages

• Compulsory Liquidation ensures the assets are sold and the proceeds are distributed in accordance with legal priorities
• No other creditor can start or continue legal proceedings against the company without court permission after a Winding Up Petition has been presented

Disadvantages  

• You have no control over the timing of the process – you could be forced into liquidation when you’re trying to resolve your debt problems or restructure the company
• The petition is advertised in The Gazette, becoming public knowledge and causing reputational damage
• The IP will investigate your role in the failure of the company and scrutinise your conduct
• Failing to put the company into liquidation voluntarily increases the risk of penalties, including personal liability for company debts and director disqualification

If you’re unsure how to close a limited company, our experienced Insolvency Practitioners can help. We provide free company closure and liquidation advice, starting with an assessment of your finances and a discussion of your circumstances. We can then explain your options and guide you on the right path. 

We can also implement all the company closure methods discussed in this article to close your company in a tax-efficient and legally responsible way while protecting your position throughout. Please get in touch for a free consultation or arrange a meeting at one of our local offices.