This post may contain affiliate links. Which means we may earn a commission if you decide to make a purchase through our links. Please read our disclosure for more info.
The COVID-19 pandemic has hit many businesses hard. If you’re a business owner, you might find yourself in the unfortunate situation that you cannot continue running your business.
The exact steps to shutting down your company can seem like a stressful endeavor. However, rest assured that many business owners have wind up their companies every day.
Perhaps you’re not able to run the business profitably. For others, it could be a matter of practicability: you’re not willing to put in the time to run the business.
You might have come across a few guides online about closing your business. One thing you might have come across is striking off a business, and liquidating a company.
What’s the difference? You’ll learn about this an more in this article. Let’s begin!
Table of Contents
- How to plan for the closure
- How to handle letting go of employees
- Methods of closing your business
- What it means to be solvent
- What is a Voluntary Strike Off
- What is a Members Voluntary Liquidation (dissolution)
- Which should you choose- Strike Off or Liquidation?
How to plan for the closure
Before we talk about the differences between a strike off a liquidation, let’s make sure you’ve got your ducks in a row first.
You can’t just call up your customers and tell them that you’re ceasing operations tomorrow. There are many threads to tie up first. This is best done together with your accountant.
Here’s a non-exhaustive list of things you need to do:
- Collect all accounts receivable
- Pay your accounts payable, payroll etc.
- Contact stakeholders e.g. customers, vendors, landlord, employees, bank etc. to inform them of the closure.
After working through this with a professional, you should have a comprehensive step-by-step plan on shutting down the business, complete with timelines and people responsible.
How to handle letting go of employees
One of your biggest responsibilities as a business owner is to ensure the wellbeing of your staff. UK Law requires that you take specific actions such as:
Telling HM Revenue & Customs that you won’t be paying employees anymore and sending them payroll reports
Pay the final salaries including PAYE
Send out P45s to each employee – this is a form that tells the employee how much tax they’ll need to pay from their salary.
Methods of closing your business
Closing your business depends on various factors. The first factor is what kind of business you have: is it a limited company, partnership, or are you self employed?
For this article, we’ll assume that you’re running a limited company.
A limited company is a company that has shares and shareholders. Again, there are factors that will determine your next steps such as – is the business solvent or insolvent?
What it means to be solvent
You are solvent if you have enough assets to cover your debts once you liquidate. For solvent companies, you can either choose a strike off or Member’s Voluntary Liquidation (also known as a dissolution).
If you can’t pay off your debts though, then you are considered insolvent. The control is handed over the business’ creditors (people who your business owes money to).
What is a Voluntary Strike Off
A strike off means that your business will be struck off the Companies House Register. This process can be undertaken by the company’s directors, making a more affordable option.
However, there is a catch:
You have to meet the following criteria to undertake a strike off:
- You must have kept the same business name in the preceding three months
- You have not done any business or sold any stock in the preceding three months.
- The business must not be threatened by liquidation
- The company must be solvent
There are serious consequences if you have your company struck off while you don’t meet the requirements.
For example, if your company is actually insolvent, you could face personal liability and even fifteen years of being disqualified from starting another company.
What is a Members Voluntary Liquidation (dissolution)
Unlike a Strike Off, a liquidation is carried out by a licensed insolvency practitioner. Such professionals are easy to seek out – usually they are businesses that deeply understand UK laws and specialize in UK company closure.
This means that you’ll be paying more to close your company. However, this may be preferable when you are strapped for time.
Which should you choose- Strike Off or Liquidation?
So should you choose a strike off or liquidation? Let’s go over the factors we discussed earlier:
Of the two, striking off is the more cost effective option because this is something you can do yourself, rather than hiring a professional.
Do you meet the requirements of Striking Off
You can refer to the criteria for a Strike Off that we shared earlier. In essence, to qualify for a strike off, your company would have been dormant for some time.
With a strike off, the directors must ensure that no threats of legal action exist, or that the company does not face any threats of liquidation. If these requirements are not met, you could face personal liability. A Member’s Voluntary Liquidation involves a professional liquidator which guarantees that all laws surrounding a winding up are followed, thereby reducing your risk.
The reasons for closing the company
These are the situations where a Member’s Voluntary Liquidation might be preferred:
- No one wants to carry on the business any more
- The owner of the business wants to use the assets of the current company in another business
- During a reorganization where the current company is redundant.
There are two main ways to shut down your business if it is still solvent: a strike off and a member’s voluntary liquidation (dissolution). We went over the requirements for strike off and some reason that you might choose one over the other.
You should remember that the process to shut down your business varies greatly. There are different avenues to explore if you’re a partnership or self-employed. There is also another procedure still if you are not solvent.
Shutting down your business is the start of a new chapter. Let us know if you have any questions about shutting down your company in the comments below. We wish you all the best for your endeavors!