When do you know it’s time to close your business?

Common reasons for closing a limited company

Running a business can be incredibly rewarding, but there may come a time, whether it’s due to market conditions, personal reasons or its financial performance, when the right thing to do is close it down. 

The most common reasons for closing a company include:

Wanting to retire

If you want to retire, have no one to take over the business and cannot sell it (perhaps it cannot function without your knowledge or skill), closing it is the logical step. Choosing an appropriate company closure method will enable you to extract the profits and assets from the business in a tax-efficient way.    

It never took off

Business owners set their companies up with high hopes, but it’s sometimes the case that the demand you thought existed for your products or services is not really there. If you can’t diversify, then closing the company can prevent further financial strain. 

Personal reasons

Running a business is never easy, and if you’re stressed and burned out and feel like your health and happiness are suffering, it might be time to call it a day. Alternatively, you may have lost the passion, be relocating or want to pursue different challenges. 

The company has ceased trading

The company may be a subsidiary you no longer need or you may be returning to employment. Whatever the reason, if your company has ceased trading, closing it avoids any ongoing administrative and financial burden.  

It’s struggling financially

The most common reason for closing a limited company is financial challenges. Constant cash flow shortfalls may make it impossible to operate effectively, or you may face threats of legal action from creditors such as suppliers, lenders and HMRC. If the company is no longer viable or you want to be free from the stress, closing it via liquidation could be the best approach.   

When is the right time to close your business?

Recognising when it’s the right time to close a company can be challenging. There are usually clear warning signs, but directors are often too busy or too close to the business to recognise them. 

Indicators that it’s time to close the business include:

Financial difficulties

• It has high levels of debt that are becoming increasingly difficult to manage and creditors are threatening or taking legal action against you.
• You can no longer cover the business expenses when they are due, such as operational costs, tax payments and payroll, and there’s no clear path to profitability.
• You’re struggling to generate sufficient cash flow and are unable to secure new funding.

Business performance

• Sales are falling and new competitors or technology are making your products or services obsolete.
• You’re working long hours and investing your own money in the company, but you still can't make it grow. 
• Your business model is fundamentally flawed or unscalable.

Personal factors

• You're putting so much time and effort into the business that it’s negatively impacting your physical and emotional health.
• You no longer have a passion for the business, dread going to work or find it difficult to motivate yourself.
• Your personal or professional goals have shifted and they no longer align with the business’s purpose or mission.

How do you know it’s time to close your business?

If you recognise these warning signs in your own business, you should seriously consider its future and seek advice. If personal factors or business performance are causing you to consider your future, friends, family and advisers like mentors and accountants can be a trustworthy source of advice. 

On the other hand, if your business is struggling financially, you should contact an Insolvency Practitioner. They will discuss your circumstances, assess your financial position and guide you on your options. They may suggest ways to rescue the company, such as negotiating payment plans with creditors or exploring alternative forms of funding. 

Alternatively, they may advise you that the business is insolvent and has no realistic prospect of making a recovery. In that case, closing it sooner rather than later will help you avoid adverse financial and legal consequences.

How can I close my business?

If you decide it’s the right time to close your business, you need to use the most appropriate closure method. There are three main options to choose from, depending on the reasons for the closure and the company’s financial position.

Strike Off/Voluntary Dissolution

The cheapest and quickest way to close a business is typically through a process called Strike Off, also known as Voluntary Dissolution. However, you can only use the Strike Off procedure to close a company that can pay all its debts. 

If the company has more than £25,000 in retained profits and physical assets to distribute to its shareholders, a Members’ Voluntary Liquidation will usually be a more tax-efficient option.

Members’ Voluntary Liquidation   

If your company can pay all its debts and has more than £25,000 of profit to return to the owners, a Members’ Voluntary Liquidation (MVL) is likely to be the most cost-effective way to close it.

In an MVL, you pay Capital Gains Tax (CGT) on all the profit you extract from the company, rather than just the first £25,000. You may also be able to claim Business Asset Disposal Relief to reduce the rate of CGT you pay. 

Creditors’ Voluntary Liquidation

If your company has debts it cannot pay, you can use a Creditors’ Voluntary Liquidation (CVL) to close the business and deal with those debts properly. A liquidator will sell the company’s assets and use the proceeds to pay the creditors as far as possible. Any remaining debts will be written off when the company is closed. 

A benefit of the Creditors’ Voluntary Liquidation procedure is that you may be able to claim director’s redundancy pay, which leads to an average payout of around £10,000. 

Is now the time to close your business? 

If you are considering closing your business but are unsure how to proceed or whether it’s the right step to take, we can provide honest and impartial advice. 

At Real Business Rescue, we have decades of experience helping directors save and close their companies. After an initial assessment, we will explain your options and guide you through an appropriate company rescue or closure method while working to protect your interests throughout. Please get in touch for a free, same-day consultation or arrange a meeting at one of our 100+ offices throughout the UK.