This content was updated September 2024
Whether you’re retiring or you’re ready for your next challenge, closing a business can be a stressful and time-consuming process. You need to tie up all loose ends, meet your legal and tax obligations, and potentially handle employee redundancies.
Don’t worry - our step-by-step guide explains how to close a limited company, end a partnership or stop being a sole trader, so you can exit your business smoothly.
Jump to
- Preparing for closure
- Your duties as an employer
- Closing a limited company
- Capital Gains Tax (CGT)
- Stopping self-employment as a sole trader
- Ending a partnership
- Record keeping
Preparing for closure
Before you take any action, you need to plan a strategy for how and when you will close your business. Businesses have a lot of moving parts, especially if several decision-makers or stakeholders need to be consulted, meaning it can take time to prepare and finalise the closure. Your business plan is a good place to begin to understand all the areas you need to consider.
Start by planning out a timeline of who you need to contact or the paperwork you need to complete. Make a list and add timescales or deadlines next to each task, for example:
- Contact accountant
- Collect overdue payments
- Close customer accounts
- Contact suppliers
- Contact landlord
- Notify insurance
- Consult with staff
- Contact business banking
- Check all contracts for termination provisions
- Check your lease to see when it ends and how much notice must be given and how
- Check to see if you've given any personal guarantees
This list isn’t exhaustive because what you will need to do all depends on how your business operates. Don’t forget that you will need to account for any costs incurred between now and when you stop trading, such as rent or electricity, paying suppliers etc so you must ensure that you have enough cash to pay the bills.
Your duties as an employer
Guidance and template letters for carrying out redundancies are available on the FSB Legal Hub. Additionally, FSB’s 24/7 HR helpline can advise FSB members on carrying out redundancies and other employment matters. You should always get legal advice from the advice line before taking any action.
If you have employees, you have additional responsibilities as an employer. This is an important step in closing your business because you need to be mindful of employee rights.
You must consult your employees if you’re planning to make redundancies. Note that if you’re proposing to make 20 or more redundancies at a single establishment in a 90-day period, this will trigger the obligation to consult collectively, as well as individually with employees over a minimum 30-day, or 45-day period. Read our in-depth guide to redundancy for further guidance.
- Tell HMRC you’ve stopped employing people
- Pay final wages, outstanding PAYE and National Insurance contributions
- Send out P45s
- Send final payroll reports to HMRC
- Close your payroll scheme
Closing a limited company
To close a limited company, you must have the agreement of the appropriate amount of directors and shareholders before you decide on an exit strategy.
There are two scenarios you might be facing: closing a solvent business and closing an insolvent business. Let’s look at the steps you need to take for each and the process to follow.
Solvent company
You can apply to get the company struck off the Companies Register (frequently referred to as dissolution), which costs £44, if your company:
- hasn’t changed names in the last 3 months
- isn’t threatened with liquidation
- has no agreements with creditors, e.g. a Company Voluntary Arrangement (CVA)
Send copies of your application to anyone affected within seven days, such as members, employees, and creditors. Failure to do so could result in a fine.
Members’ Voluntary liquidation
Alternatively, you can apply for members’ voluntary liquidation if your company can pay its debts.
This can only take place where the directors are able to give a statutory declaration of solvency, to the effect that the company will be able to pay all its debts in full within 12 months. A members' voluntary winding up is started by the members passing a special resolution (75% majority) within five weeks after the directors have sworn their declaration of solvency. As the debts will be paid in full, shareholders are given control over the process, including the choice of liquidator, and less information is passed to creditors. This process is sometimes referred to as solvent liquidation. In Scotland, you need a form 4.25 (Scot)
Insolvent company
You are unlikely to be able to get your company struck off the register as your creditors need to be notified and are likely to object. In this case, the interests of the creditors your company owes money to legally come before those of the directors or shareholders.
Creditors’ Voluntary Liquidation
A Creditors' voluntary liquidation (CVL) is where the directors are not willing (or able) to give a statutory declaration of solvency. A creditors' voluntary winding up is started by the members passing a special resolution. Under this process, and because there is not enough money to pay everyone, creditors are given more control over the process, including control over the choice of liquidator.
A company goes into CVL if its members pass a special resolution for its winding up, with a majority of at least 75%. The members nominate an insolvency practitioner to act as liquidator. The liquidation is deemed to commence from the passing of the resolution.
After the resolution to wind up, the company's creditors may appoint a different person or persons to be liquidator(s). The directors must deliver a notice to the creditors seeking their decision on the appointment of the company's liquidator(s), by either a deemed consent procedure or a virtual meeting. The notice must contain certain information required by IR 2016. The so-called "decision date" must be no earlier than three business days after the notice is delivered and no later than 14 days after the members' resolution was passed to wind up the company. Creditors may also request a physical meeting under the IA 86.
The directors of the company must prepare a statement of affairs and send it to the company's creditors within seven days after the date of the members' resolution, to reach them no later than the business day before the decision date.
You can find detailed guidance on dissolution, liquidation, and insolvency on the government website. In addition, there is guidance on the FSB Legal Hub in our factsheet on Corporate Insolvency.
My company is no longer trading, do I have to close it?
You can let it become ‘dormant’ if there’s no business activity, trading or income received. As you’d still be registered with Companies House, you’d be required to continue to send your annual accounts and confirmation statement.
If a limited company is allowed to carry on trading after a point in time whereby it is technically insolvent, the directors of that company can become personally liable thereafter and have to contribute to the assets of the company from their own personal funds.
There are also rules preventing directors from treating creditors preferentially to others, giving away assets, or selling them at an undervalue. Generally these can all be set aside, that is to say overturned, and this is with a view to making sure all creditors of a limited company are treated fairly.
Announcing the closure
Once you’ve made the decisions and preparations, the next question is how to announce a business closure and who you need to tell. Before you go any further, you’ll need to let all relevant parties know about your decision.
- Let HMRC know you plan to close your business and are no longer trading
- If you’re an employer, you must tell your employees about the closure and follow the correct steps. [Link to employer section below]
- Talk to your insurance about your policies, as simply cancelling could leave you exposed to claims even when you’re no longer in business. Some professional bodies require you to retain your professional indemnity insurance for a certain amount of time after you stop trading.
- Inform your landlord by giving the appropriate notice of termination
- Check all contracts to ensure you bring these to an end correctly
- If you’re registered under the Construction Industry Scheme (CIS), you must let HMRC know you want to stop trading as a contractor or subcontractor.
Paying taxes
When you start to close your company, a new accounting period starts and runs for 12 months. You must pay Corporation Tax at the same rate on taxable profits, for example if you sell off goods to pay creditors or any trading income.
You will need to:
- Submit your final statutory accounts and company tax return
- Pay your final tax bill, including any corporation tax, VAT and National Insurance contributions
- Cancel your VAT registration
Capital Gains Tax (CGT)
If you sell something that’s increased in value, you must pay CGT on the profit. Business assets are a chargeable asset, so you may have to pay this depending on how much profit the business has. Record your gains on your self-assessment tax return. You’ll need to keep your records for five years.
Business Asset Disposal Relief, formerly known as Entrepreneur’s Relief, may reduce the amount of CGT you pay. This is a reduction in CGT, meaning you’ll pay a lower rate of 10%. You must have owned the business for two years to be eligible.
The relief was reformed rather than scrapped in 2020 thanks to successful campaigning by FSB. The current lifetime limit is £1 million.
Once all payments have been made, you can contact your business bank account to close it. After dissolution, any money or assets still in the business goes to the government.
Stopping self-employment as a sole trader
- Tell HMRC by the end of the tax year (5 April) that you’ve stopped trading. You can do this online.
- Send your final self-assessment tax return before the deadline. You’ll need to detail income, expenses, capital allowance, any Capital Gains Tax, and final profit or loss. If you have an accountant, they can help you with this.
- Pay your final tax bill, including any tax, VAT and National Insurance.
- Cancel your VAT registration if necessary.
Ending a partnership
- Let HMRC know you plan to close your business and are no longer trading.
- Send your final self-assessment tax return before the deadline. You’ll need to detail income, expenses, capital allowance, any Capital Gains Tax, and final profit or loss. If you have an accountant, they can help you with this.
- The nominated partner must send a final partnership tax return in addition to their personal self-assessment tax return.
- Pay your final tax bill, including any tax, VAT and National Insurance.
- Cancel your VAT registration if necessary.
There is a useful factsheet on the Dissolution of a Partnership on the FSB Legal Hub, dealing with the legalities associated with bringing a partnership to an end. The starting point as to how to handle such a scenario is the partnership agreement if you have one. If not, the partnership is likely to be considered a “partnership at will” governed by the rules set down in the Partnership Act 1890.
Do you need to keep records?
Yes, you must keep business documents for seven years, such as bank statements, invoices, and receipts. Copies of employer’s liability insurance must be kept for 40 years.
Alternatives
This guide deals with scenarios whereby you have decided to close your businesses. Obviously, there are all potential alternatives including selling the business, if possible. Certainly from a limited company perspective, there are ways that you can potentially, where appropriate, try to rescue a struggling business, for example by entering into administration. Professional advice should be sought in this regard. Again our factsheet on Corporate Insolvency on the FSB Legal Hub and provides a useful overview.