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Understanding your options for closing down a solvent company

Members’ Voluntary Liquidation, or MVL, is a process that’s commonly used by company directors looking to close down a solvent business and extract the cash tied up in it. An MVL requires the appointment of a licensed insolvency practitioner (IP), and as such, it attracts professional fees.

Company dissolution, also known as strike off, also results in the closure of the company but can be done by the directors of the company without the involvement of an insolvency practitioner. Despite this, opting for an MVL is likely to be the best option for most companies with a significant sum to distribute to shareholders.

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Hidden implications of striking off your company

If you look deeper into how each procedure works, and the potential implications for you as a director, the choice between the two processes comes down to much more than the cost differences. While strike off is much cheaper than an MVL,  other factors need to be considered, such as the peace of mind obtained when a licensed professional is involved, the potential for future litigation with company dissolution, and the tax treatment of any cash taken out of the company prior to closure.

So what should you consider when thinking about Members’ Voluntary Liquidation and company dissolution, and which process would be the best option when closing your limited company?

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MVL vs company dissolution: what are the main considerations?

As we’ve already mentioned, Members’ Voluntary Liquidation attracts far higher costs due to the involvement of a licensed insolvency practitioner, who oversees and administers the process on your behalf.

Company dissolution is more of a ‘do-it-yourself’ option when a solvent company needs to be closed down, and can be done for as little as £8 if the application is done online. But there’s another potential cost element involved with company dissolution that needs to be considered.

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Potential for reinstatement as a limited company

Once the MVL process is complete, the liquidator instructs Companies House to remove the business from the Register of Companies. You can be certain that all your statutory duties have been fulfilled as they’re in expert hands, and there will be no potential for reinstatement of the company or claims by creditors.

With company dissolution, the opposite is true. You fulfil your statutory duties yourself as a director, including informing all creditors without exception that you intend to close the company down.

If you accidentally omit to tell a creditor of this situation they can apply to have your company reinstated up to 20 years later, and take legal action to recover their debt. Clearly, this could have legal implications for you personally, as you’ve gone ahead and closed a company that was supposedly solvent.

Tax advantages of a Members' Voluntary Liquidation (MVL)

One of the major advantages an MVL has over strike off, is how the money extracted from the company is treated. With strike off, any money you take out of the business will be classed as income and you will pay the corresponding rate of tax.

With an MVL, however, all money taken out during the liquidation process will be classed as capital gains and you will be taxed accordingly. In additional, the payable rate of Capital Gains Tax (CGT) can be halved from 20% down to just 10% thanks to Business Asset Disposal Relief. You can take advantage of Business Asset Disposal Relief up to a lifetime limit of £1m worth of capital gains.

Which is the best option for closing a solvent company – MVL or dissolution?

Company dissolution

Company dissolution does have its advantages, but it’s important not to underestimate the work that’s needed to carry out this procedure. You have to follow a strict and formal timeline when dissolving a company, starting with ceasing trade three months prior to the application for strike-off.

Statutory accounts, returns, and tax payments must all be brought up-to-date, all creditors have to be informed of your intention to strike-off your company and they do have the right to object to your strike off application.

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Members’ Voluntary Liquidation

MVL provides reassurance and peace of mind, as a professional assessment is made of your company’s financial position and a specialist is handling the procedure from beginning to end.

If you would like more information and advice on which process would be better in your circumstances – company dissolution or MVL – please contact one of our partner-led team at Real Business Rescue. We work from a large network of offices located around the country, and can offer you a free same-day consultation.

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