The COVID-19 pandemic has taught us lots about our businesses and our personal lives and it has made many people reassess the balance between these two elements. The crisis has brought into sharp focus the fact that ‘the only certainty is uncertainty’.
For some business owners, who perhaps have worked on their business for many years, the thought that ‘there must be more to life’ is too loud to ignore. Those in a secure financial position might be thinking that they’d like to bring forward retirement plans and quit while they’re ahead. So how do they go about exiting from their business?
To strike off or to liquidate, that is the question
If your solvent company has no debt but no cash either, because it’s dormant or never traded, striking off might be the quickest and most cost-effective way of closing down the business. With the simple submission of a form to Companies House and a fee of £10, your company can be dissolved in two months as long as it hasn’t traded, sold stock or changed names in the previous three months.
If your business has cash in the bank and assets, liquidation is the preferred route to wind up a limited company as it gives shareholders greater control of the assets. Liquidation ensures that all the company’s affairs are properly managed – contracts are completed or transferred, legal disputes are settled, assets are sold, monies owed are collected and creditors are paid. Only after these are completed can the shareholders receive any remaining funds.
In 2020, 1 in 342 companies were liquidated. This equates to 29.2 per 10,000 active companies in England and Wales which is slightly reduced from 2019 figures, according to The Gazette, the official public record for insolvency. There are different types of liquidation:
Members’ Voluntary Liquidation – shareholders make the decision to put the company into liquidation if there are assets available to pay off debts. The directors must appoint a licenced insolvency practitioner as liquidator and sign a declaration. A general shareholders meeting within five weeks then must pass a resolution to wind up the company and a notice must be advertised in The Gazette within 14 days. Finally, the signed declaration is sent to Companies House within 15 day of passing the resolution.
Creditors’ Voluntary Liquidation – shareholders make the decision to put the company into liquidation, but the assets are not enough to cover the debts. If a company can’t pay the monies owed to its creditors, the business can’t continue and directors can voluntarily place it into liquidation.
Compulsory Liquidation – a court order is made to wind up the company on the petition of all the directors (this cannot be made with just one director). The most likely scenario is that HMRC will petition the court when a company can’t pay its taxes and an agreement can’t be made.
Liquidation is more costly than striking off your company and you must enlist the help of a licenced Liquidator, but the process ensures that you can take advantage of Business Asset Disposal Relief (formerly known as Entrepreneur’s Relief) and extract the assets in a tax-efficient way to maximise the return for shareholders.
Business Asset Disposal Relief
If you have owned at least 5% of the company for a year, you can claim this relief which allows you to pay a reduced rate of 10% Capital Gains Tax on the disposal of the business (with a £1 million lifetime limit). This relief is subject to qualifying criteria and may not be available to all companies.
With a few different liquidation options and processes to consider, it’s essential to speak to an expert in the field. If you’re thinking of liquidating your company, start the conversation with the team at CRM on 01865 379272.
