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Closing a Privately Owned Business

 

Continuing our present series of blogs on random business topics, we now look at a relatively unusual issue, that of closing down a privately owned business.

Mostly, businesses are either handed down to family or management, or sold to an external buyer. Sometimes though, for a variety of reasons, it is preferable for an owner to simply close their business down instead. Although professional advice is usually that however modest a business, there is always some additional value as a going concern, once in a while personal or business reasons make closing down the most attractive course of action. This is referred to as a voluntary liquidation. What are the key factors?

• First it should be stressed that closing is not a full liquidation, and a voluntary liquidation is not held to be an insolvency procedure, so there are no credit issues. Closing down a business is a voluntary and unforced action, the aim usually being to realise the assets in the business, especially any cash built up.

• This type of closure is called a Members Voluntary Liquidation (MVL) and the first key factor is that the business must be solvent. It should also have distributable reserves exceeding £25,000.

• One of the main reasons for selling outright is to receive the benefit of Entrepreneurs’ Relief on the Capital Gains Tax (CGT) usually only achieved through a sale, but this can still be possible through closing down.

• To close your business you must firstly ensure that all debts have been paid, all monies owed received, and that all taxes are up to date. You must also cancel any contracts of any type. By implication the business whilst still theoretically trading will in effect be almost dormant.

• The next step is to inform Her Majesty’s Revenue and Customs (HMRC) that you wish to “deregister” the company. This means that the trading company will be removed from Companies House.

• You will then be able to withdraw any cash reserves from the business, which are entirely your property as owner, but your key aim will be to do so in the most tax efficient manner.

• The best way to achieve this is to make a Capital Distribution within three years of ceasing to trade, thus attracting Entrepreneurs’ Relief (currently 10%) on the net gain on closure.

• To qualify for Entrepreneurs Relief, your company must have traded for at least 12 months prior, and you as owner must own more than 5% of the share capital.

• The Capital Distribution must be made through a formal liquidation, and you will need to appoint a Liquidator, pass a special resolution and a declaration of solvency. The costs of all this can be relatively high, as there will be liquidator’s fees, plus various official fees.

• Once a liquidator is appointed, the Company itself will not carry on any further business (other than necessary to assist the liquidation) and all your powers and responsibilities as Director will cease, and pass to the liquidator.

• The liquidation process is officially completed when, after the due process, the Liquidator calls a final General Meeting, where the account of the liquidation is presented, and in relation to which there are various official procedures, culminating in a formal advice to the registrar of Companies, and after a three month period, the company will be stuck off at Companies House, thus officially ceasing to exist.

• With an MVL, when the liquidation process is complete the liquidator will distribute the proceeds to you as shareholders. The distribution to shareholders is treated as a capital gain and not taxed as income / dividend, and Entrepreneurs Relief will reduce the tax rate (currently to 10% as opposed to 18%), provided the gains are less than £10m.

Whilst relatively simple especially for a truly solvent company with a genuine reason for closure, closure cannot be undertaken without an independent liquidator, and there are many official steps, for which, as always, good professional advice is essential.

Posted on by Mike Halls

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