Telling the truth about SME life today

What Is A Dormant Company?

What Is A Dormant Company?

A dormant company is a registered business that is no longer active but retains the legal status of a business. The term ‘active’ refers to carrying out accounting transactions or business operations but even without these activities, a dormant company files annual legal and administrative papers so that it can remain registered as a company. Dormant companies are often a result of business failures, strategic decisions to pause trading, or economic downturns.

Dormant Company Overview

Keeping a formal registered company status despite not actively trading or bringing in any income can offer several strategic benefits for business owners.

  • Restarting a dormant company is much more time and energy-efficient than starting a new one from scratch, should economic and business circumstances allow.
  • The process of dissolving (closing) and then setting up a new company takes a lot more legal paperwork and comes with registration costs and the time to administer the changes.
  • A dormant company creates lower tax obligations than an active one. When dormant, company directors can put operations into maintenance mode until they’re ready to restart business activity. This saves money on staff, building, and equipment overheads.
  • During this time, minimum annual compliance rules must be met. This includes submitting financial statements and making changes to director records if needed.

In summary, keeping a company dormant means that business owners have more flexibility should they decide to reactivate business operations in the future following a period of forced or planned inactivity.

What Causes A Company To Become Dormant?

The number of dormant companies in the UK is rising and there are plenty of reasons why a company may either decide to enter a dormant state or be forced into winding down its operations.

  • Economic downturns and Recessions
  • Business failures
  • Startup and Growth Stagnation
  • Restructuring and Downsizing
  • Disasters and External Events
  • Abandoned business ideas

Economic Downturns and Recessions

When the economy is in recession or declining, consumer spending will likely reduce. This means that some businesses, particularly those reliant on leisure spending, will see their income reduced.

If this reduced income happens quickly, it can lead to a sharp drop in sales revenue which can in turn force difficult decisions to be taken by directors. This could result in winding down certain areas of the business, laying off staff or closing down parts of the business entirely.

Stats show a spike of around 25% more dormant companies at the height of the 2008 global financial crisis.

Business failures

Sometimes business ideas, setups, relations, and delivery just don’t work out as intended. Whether due to a breakdown in director relations, spiralling costs vs lack of revenue, poor business management, or other reasons, businesses can and do fail all of the time. Eye-opening stats state that 20% of businesses turn dormant in their first year and 50% by their fifth year.

Startup and Growth Stagnation

Startups can face higher failure rates than regular businesses due to the reliance on investor funding and difficulty at the customer adoption and scaling up stage of operations. If these hurdles prove to be too big to weather at the time, the business may become dormant until new product markets are discovered, further funding is available, or new achievable business growth plans are made.

Restructuring and Downsizing

When large businesses go through downsizing or restructuring processes, they can put parts of their business into dormancy. For example – a large manufacturing company may shut down a factory/operations on one particular product line temporarily or a bank might close certain branches to try and cut operating costs.

This kind of flexibility is particularly beneficial for large corporations as it means they can reduce costs when needed but also leave the door open to restore operations in the dormant areas in the future if feasible.

Disasters and External Events

If physical business premises are damaged from natural disasters such as floods hurricanes, and storms, it can make business operations impossible. In situations that are outside of the business management’s control, businesses can often be forced to cease business operations until repairs to business infrastructure are made. For example, the coronavirus pandemic of 2020 upset so many supply and demand equilibriums across the globe, that lots of companies were forced into dormancy until the world recovered.

Abandoned Business Ideas

It’s fairly common for businesses to be set up and then never actually get to the point of trading. This could be due to a lack of motivation on the business owner’s part, personal circumstances that render starting a new business impossible, a change in financial circumstances, or inner disputes between business partners derailing plans very early on. In cases like these, the company will remain in a dormant state rather than being dissolved.

Requirements and Compliance Rules for Dormant Companies

Even though there are no (or very few) active transactions in a dormant company, key legal and administrative compliance must still be met. These requirements will vary based on the country the business is registered in, but commonly include:

Submitting Accounts Annually

Part of the compliance needs for an incorporated company is to submit statutory annual accounts, and this remains even if it is dormant. The accounts will be much simpler without any trading activity to cover, but dormant companies must still submit; confirmation statements that show no trading activity present, annual profit and loss statements showing a zero turnover, fixed asset register listing the company assets and an annual balance sheet summary.

Annual Tax Returns

Directors will need to submit their annual tax return declaring nil trading income from their business.

Director Meetings

Annual meetings, with formal minutes, must take place that formally document that no trading has taken place. These must be filed too.

Just like trading companies, if a dormant company fails to meet its reporting and compliance obligations, it will be open to penalties. This could be late fees, being removed from the company register entirely or directors being disqualified.

It’s important therefore to stay on top of the rules and regulations surrounding dormant companies.

Advantages and Disadvantages of Remaining Dormant

Advantages of Dormancy

Avoiding Operating Costs

The main financial advantage of going dormant in the UK is significantly lowering yearly operating costs associated with staffing, premises, inventory and other overheads necessary for active trading. Directors can minimise expenses until ready to relaunch business activities.

Retaining Company Structure

Choosing dormancy over full dissolution enables retaining the registered company intact including ownership shares, directorship structure and other incorporation documents. Reinstating operations is facilitated using the existing corporate entity rather than re-establishing from scratch.

Asset Protection Staying dormant shields company-held assets like intellectual property, equipment or property from seizure or liquidation during business inactivity. Directors remain empowered to manage assets until resuming commercial activities.

Disadvantages of Dormancy

Reactivation Expenses Transitioning back from dormancy incurs reactivation costs related to resuming compliance, taxes, hiring, marketing and other trading expenses. Adequate capital must be arranged.

Reputational Impacts Prolonged dormancy periods exceeding 3-4 years can negatively impact market reputation, customer perceptions, creditworthiness and supplier relationships when restarting the business.

Non-Compliance Penalties Despite dormancy, submitting accurate annual accounts, tax filings, and Annual Returns and upholding other legal requirements remains mandatory or penalties apply.

Directors Disqualification If statutory annual filings are missed repeatedly while dormant, directors risk compulsory court undertakings or potential disqualification as a company director.

Administration-Linked Dormancy Large UK firms like retail groups often use insolvency mechanisms like Company Voluntary Arrangements with periods in administration-linked dormancy for financial restructuring before resuming trading.

Overall the flexibility of resuming business makes dormancy advantageous temporarily but ongoing legal compliance incurs costs.

Exiting Dormancy and Reactivating

If a company has been dormant for any period, the point that it becomes active again marks its exit from dormancy.

There is no formal notification process required to let companies’ houses know that the business is operating again. Directors would simply file their next set of annual statutory accounts which would then indicate they are commercially trading again due to the income and expenses figures presented.

Business owners would need to ensure that all requirements around hiring staff and paying them, along with tax obligations, bookkeeping, and company filing are met. Thresholds may have changed since the business was last active, so it’s important to check all current rules and regulations when operations restart.

There are plenty of costs involved in re-starting a dormant company. From staffing, sales & marketing, inventory, and premises fees, it’s important to make sure that the business has secure funds available to see them through both the start-up and continued operations phase.

Step-By-Step Reactivation Process

When the time comes to regain active trading again, dormant business owners will need to follow the key steps outlined below:

  • Appoint advisors including accountants, lawyers and tax advisors to ensure a smooth transition from dormancy to active trading. This phase would cover legal due diligence of the company status and director liabilities, ensure valid insurance is in place, set up financial records for active trading, and re-register for relevant taxes like VAT and payroll.
  • Raise enough capital to fund reactivation costs and relaunch operations, as well as having a capital buffer. Funds will be needed to hire new staff, market the business, purchase inventory, and sustain daily operations. Capital can be raised through investments by shareholders, and business funding from loans or credit. Budgeting is very important as without adequate funds, newly relaunched ventures could fail again within 12-18 months.
  • Develop a 3-year business plan with financial projections. This should include an executive summary, go-to-market strategy, competitor analysis, operations plan, staffing plan, financial projections with cash flow forecasts for 3 years, funding needs and risk analysis.
  • When ready to relaunch – a strong marketing campaign should be planned and rolled out to ensure maximum visibility of your business to your target audience. This is key is rebuilding brand awareness and developing a loyal customer base as operations grow again.

Dormancy Myths Buster

Many companies incorrectly believe that they can trade in small volumes during dormancy but this is not true. Even occasional invoices or transactions will remove a dormant status.

Directors remain fully responsible for their company, even in its dormant state. This means annual compliance remains similar to active companies as discussed above.

Many believe that they don’t need to continue with their annual filing obligations when a company is dormant but this is false. Simplified versions of accounts showing zero trading and income must be submitted. It’s important to realise that a dormant status doesn’t change legal accountability to file statutory paperwork annually.

Summary

Companies will be considered dormant from a tax and compliance perspective if they don’t have any active income streams and have stopped trading commercially. Even when commercially inactive, dormant companies must still submit annual accounts, directors reports, tax forms and shareholder notices. Failure to meet these requirements risks penalties such as late fees, removal from the company’s register or legal penalties for non-complying directors.

A dormant company can begin trading again by letting companies’ houses know through their filings, without having to make an official notice of exiting their dormant status.

It’s recommended that dormant companies seek advice from expert accounting, tax and secretarial advisors for dormant companies to stay on top of compliant requirements that may evolve during the period of dormancy.

The overarching takeaway about dormant companies is that they must still adhere to all statutory rules in their country of registration, despite not actively trading.

Trending

Topic

Related Stories

More From

Most Read

Trending

If you enjoyed this article,
why not join our newsletter?

We promise only quality content, tailored to suit what our readers like to see!