There are many reasons why a business may need to close. The owners may have reached retirement age or they could be facing financial difficulties and be in debt.
If they are unable to pay off their debt and can’t pay creditors, the business becomes insolvent and will need to close down.
They could also want to shut their business due to market changes. When you must stop trading, you must legally close down your business effectively.
The business closure process UK for closing your business varies depending on whether you own a limited company or a sole trader. It also depends on whether your business is solvent or insolvent when you need to find out how to close a business. The procedure also differs whether you are in a partnership or not.
When you are closing your business, you need to follow the correct legal procedure, whether you are a small business or a larger company. As a professional legal partner, we can help to navigate the complexities involved in closing down. That way, you are not at risk of financial claims.
In this article, we discuss the following regarding how to legally close a business:
We discuss the procedures for different business structures including sole traders and partnerships.
We also look at how to close a limited company UK
We look at how to shut down legally when your business is insolvent
We explain how to shut down the company taking legal obligations into account
The common mistakes you need to avoid when closing a business
How to Close a Business as a Sole Trader
When you are closing a business as a sole trader, there are several steps you need to take to legally shut your business. If in doubt, a small business lawyer can help guide you through the process.
Settle debts
As a sole trader, you are personally liable for all of your business debts. Therefore, when you want to close your business, you need to make sure all debts have been settled.
It’s best to make a list of any outstanding debts you have and need to sort out before ending your business. These may include the following:
Credit card debt
Loans
Suppliers
Employees wages
Independent contractors
Owner of business quarters
If you have any loans outstanding on your business, you need to make sure these are paid and that you do not owe your creditors when closure occurs.
Your self employed worker rights and responsibilities make you personally liable for these debts as a sole trader. You may need to use your own savings and investments to settle outstanding debts during a sole trader business closure.
Tax Implications
When you want to close your business, you need to make sure to file all outstanding tax returns. You will need to file a final tax return at the end of the tax year which will cover your trading income, any expenses and your Capital Gains Tax.
You will then work out your final profit as a business. This should be calculated up to when you finish trading and should be paid during the usual period following the end of the tax year.
Additionally, you will also need to cancel your VAT if you are VAT registered. You will then be required to file a VAT return.
Remember to keep all your tax records of the business for the following five business years.
Informing HMRC:
When you want to cease trading, you need to inform HMRC of this end to your business. You can either send a written letter to HMRC or you can do this through your account.
To do this you need your national insurance number and your UTR which is your unique tax reference number which you will also use to submit your tax return.
You need to include a final date of trading. This is essential for when you complete your tax return accurately.
Cancelling Licenses and Permits:
You also need to make sure you cancel any business license you may have in place. It’s also important to get in touch with your business insurance provider and cancel this policy.
You may be entitled to a policy refund depending on how long you have had the insurance and how you pay.
Also, any business permit such as parking that you have needs to be cancelled.
How to Close a Partnership
The business closure process UK when you are in a partnership involves sorting the following:
Partnership Agreement:
When you are in a business partnership, you will have likely set up a Partnership Agreement which states the roles and duties of each partner in the business. This agreement will specify what is expected from each party and will detail how profits are divided between the pair.
When it comes to closing the business, any existing partnership agreement will need to be followed for the closure procedures.
For example, there might be a notice period if one party wants to close the business. It should also detail how the debts will be paid off and how any outstanding assets will be distributed.
Settling Partnership Debts
The debts of the business will be shared by the partners and will be allocated depending on ownership. For instance, one partner may own 60% of the business while the other owns 40%.
In the majority of cases, where both partners own an equal amount, they will both be liable for the debts. They will have to use any remaining money left and will both be equally personally liable. Therefore, any debts will have to be cleared by their own assets.
If there is a partnership agreement, debt settlement may be discussed in this.
It’s important to tell all the creditors involved in the business if the partnership ceases to trade.
Dissolution Process:
Ceasing the business begins by first dissolving the partnership legally. One of the partners can dissolve the partnership formally with a notice of dissolution. This legal notice states the end of operations and officially ends the partnership.
You also need to notify HMRC that you are dissolving the company and do this online or via writing. This then should be followed by deregistering the company with VAT.
How to Close a Limited Company
When you want to close a limited company, the process of how to close a limited company UK depends on the circumstances of why the company needs to end.
Voluntary Strike-Off:
The company must first sort out any debts with the business and any assets left over belong to the Crown as discussed on Gov. UK’s website.
A voluntary strike-off consists of:
You need to fill out a DS01 form which must be completed by the directors of the business and signed
You then have 7 days to legally let all creditors, employees and shareholders of this course of action
Companies House will get in touch with you and the request will be in the Gazette which is the official public record.
Any objections to this can be made within 2 months.
If no objects are made, the company is officially struck off and a second notice will appear.
Members’ Voluntary Liquidation (MVL):
It may be the case that solvent companies that are closing down will need to take Members’ Voluntary Liquidation (MVL). This is for those companies who have assets to distribute and will need to take this official process which is often completed by an insolvency practitioner.
To go down this route, the directors need to declare that the business is currently solvent. All shareholders must declare that the company will enter Members’ Voluntary Liquidation.
The assets of the business are then arranged by the liquidator who will ensure all creditors are paid. They will then arrange how any remaining assets are distributed between the shareholders.
The company name will then be removed and the business is unregistered by Companies House.
A downfall to this is that, unlike voluntary strike-offs, the business can not be reinstated at all.
Creditors’ Voluntary Liquidation (CVL)
For those companies who can not pay their debts, an option to go down to close their business is a Creditors’ Voluntary Liquidation (CVL).
The formal process is completed by an insolvency practitioner who will:
Find out whether there are any company assets
Will make arrangements with creditors
They will help with making employees redundant
They will make sure the company is removed from the Companies House register.
A Creditors’ Voluntary Liquidation will cease trading and any employees will become redundant. With this process, any company debts will be written off unless there are any that have a personal guarantee.
To go down this route voluntarily, the company’s directors or shareholders can request to go into liquidation.
Compulsory Liquidation
A business may need to close because creditors have forced a company into liquidation. This normally occurs because a creditor has requested to the courts via a Winding Up Petition.
The Winding Up Petition will be in The Gazette and the reasons will be outlined for the winding up of the business.
The court will then review this notice and if they feel the business is insolvent, then a winding-up order will be granted and the company will be put in compulsory liquidation.
Assets will then be sold to pay the creditors. Shareholders can also apply to the courts to close the business through compulsory liquidation.
The liquidator will then sell the company’s assets and obtain information on all debts. They will then pay creditors. Once liquidation is complete, the company will be formally removed from the Companies Register.
Legal Obligations When Closing a Business
Here are the legal obligations when closing a business:
You need to make sure that employees are informed, and given a good notice period and redundancy payments for those who have been employed for more than 2 years.
You are legally required to arrange for the assets of the company to be distributed or sold when you close the company. This can then be shared between partners or given to the crown in the case of limited companies.
It’s also vital to arrange a final tax return and accounts. These will need to be filed with HMRC.
Common Mistakes to Avoid
When you are closing a business, these are the following mistakes you need to avoid making:
Failing to settle debts
You need to always pay off your debts as a sole trader so you are not liable.
Improper Asset Distribution
If assets are not distributed properly, you could end with legal disputes when the business ends.
Ignoring Employee Rights:
If all proper procedures are not followed, you are at risk of employee tribunals.
FAQs
How do I close a business if it has no debts?
You can close a business by letting HMRC know that you want to cease trading. You inform them online or in writing and give them a date of closure.
What happens if I can’t pay my business debts?
You could go into voluntary insolvency in which the business debts will be paid off through the company’s assets.
Can I reopen a business after closing it?
It depends on how you have decided to close a business. For example, a Members’ Voluntary Liquidation (MVL) will mean you can not reinstate the business in the future.
How long does the business closure process take?
The business closure process takes over 6 months but does depend on whether you are closing the business via Member’s Voluntary Liquidation, Creditor’s Voluntary Liquidation or compulsory liquidation.
What are the tax implications of closing my business?
You will need to complete a Corporation Tax return. You will have to submit a final self-assessment and pay your tax and national insurance for the past tax year.
Conclusion
There are multiple reasons why you may decide to close your business. You need to legally cease trading so that you do not have financial implications.
We have discussed in this article the various ways you can close the business. Whether you are a sole trader, in a partnership or are a director of a limited company, you need to take the right steps to end your business effectively.
If you have voluntarily become insolvent, we have talked about the importance of working with an insolvency company.
You need to always inform HMRC and the Companies House of your decision to end your business.
To ensure the business is closed effectively, you should seek legal and finance advice. You can then ensure a smooth and compliant closure process.
Lawhive offers services to ensure you legally end your business with a legal clean break.