How to close a business

How to close down a sole trader or partnership business

Closing down a self-employed business is relatively straightforward. There’s no legal or financial separation between you and the business - its assets and debts are also your assets and debts - and that simplifies things.  

You’ll need to tell HMRC that you’ve stopped trading as a sole trader or are leaving a business partnership by calling HMRC on 0300 200 3310 or deregistering online. To do that, you’ll need to have your:

• National Insurance Number; and
• Unique Taxpayer Reference (UTR)

You’ll also need to cancel your VAT registration (if you were registered), submit a Self Assessment tax return before the deadline and repay any outstanding debts.

As a sole trader or business partner, you’re personally liable for the business’s debts. That means any parties the business owes money to can pursue you personally for repayment. And if you cannot pay, your creditors can even make you bankrupt.

You can raise money to pay the business’s debts by selling its assets. Asset sales specialists can value, market and sell business assets on your behalf. If you sell the assets for more than you paid, you must pay Capital Gains Tax (CGT) through your Self Assessment tax return. However, you may be eligible for Business Asset Disposal Relief, which will reduce the CGT rate.   

How to close down a limited company

Closing down an incorporated business is less straightforward. When deciding on the right approach, you need to ask yourself two questions:

• Can the company repay its debts?
• Does the company have valuable retained profits to distribute?

If the answer to both questions is ‘yes’, a formal liquidation procedure called Members’ Voluntary Liquidation (MVL) is usually the best option. An informal Strike Off could be more cost-effective if the company can pay its debts but has retained profits of less than £25,000. And if the company cannot pay its debts, you need to use an insolvent liquidation procedure called Creditors’ Voluntary Liquidation (CVL).

Let’s go through each of those procedures in more detail. 

Members’ Voluntary Liquidation (MVL)

Members’ Voluntary Liquidation is usually the most tax-efficient way to close down a solvent company with over £25,000 of physical assets and cash to distribute to its shareholders. 

You must appoint a licensed Insolvency Practitioner to liquidate the company on your behalf. They will professionally value your assets and sell them at a specialist liquidation auction or to a third party. They will use the proceeds to pay the outstanding debts and distribute the rest to the shareholders, minus their fee.

Members’ Voluntary Liquidation can only be used to close a solvent company. Its main benefit over Strike Off is that all the proceeds from the sale of assets are taxed as a capital gain. You may also be eligible for Business Asset Disposal Relief. If you use Strike Off to close a solvent business with assets, you pay Income Tax on any proceeds over £25,000.

Strike Off

The benefit of voluntary Strike Off is its simplicity and low cost. You pay a nominal fee to submit your application and administer the process yourself. That means you remain in control of the company throughout and there’s no liquidator’s fee to pay.

To prepare your company for Strike Off, you must wind down its affairs by ceasing trading, paying any debts, filing final accounts with HMRC, paying any tax due, closing company bank accounts and informing all the relevant parties. Crucially, you must also transfer or sell all the company’s assets before applying for Strike Off, as the ownership of any assets it still has when it’s struck off the Companies House register will pass to the Crown.

Creditors’ Voluntary Liquidation (CVL)

To voluntarily close down a business that cannot pay its debts, you must use an insolvent liquidation procedure called Creditors’ Voluntary Liquidation. You will need to appoint an Insolvency Practitioner to act as the liquidator.

They will value and sell the company’s assets and use the proceeds to repay the creditors in a strict order. Any debts they cannot repay will be written off and you will not be personally liable for those debts as long as you have met your legal duties as a company director. The business’s name will then be removed from the official register and the company will cease to exist. 

How do you close a business down and maximise the return from your assets?

Whatever your business’s legal structure or financial position, we can help you maximise the return from your assets. At Eddisons Asset Auctions, our asset valuation, marketing and sales services enable business owners, company directors and Insolvency Practitioners to sell commercial assets quickly and for the best price.

Find out more about our asset sales service and insolvency and liquidation auctions, and get in touch for a free, no-obligation asset appraisal.