7 Signs of Why and When You Should Close Your Company

Discover the 7 key signs that indicate it's time to close your company. Learn when and why you should make the difficult decision to shut down your business.

Table of Content

Are you feeling overwhelmed and stuck with your company? Do you struggle to keep up with expenses, or maybe you’re losing the passion for what you once started with such fervor? It can hurt to admit that it might be time to close down your company, but the decision can ultimately be liberating and a relief.

Yes, you heard it right—I’m talking about closing down your company. Now, before you hit the back button or close this article with lots of anger, just hear me out once.

A company or business is someone’s dream. Sometimes it is also the only means of livelihood, the primary source of income, and so on. But this dream company or business can be a burden that weighs you down. There are various reasons why one should consider shutting down their business and doing it at the right time can be a smart decision.

Closing a company is likely low on the director’s or founder’s priority list, but there can be scenarios where it’s in the business’s best interest. It could be an unmanageable debt, or the directors can’t see a future in the company. In those situations, closing the business or company may be in the concerned parties’ best interests.

So, let’s delve into the nitty gritty of why and when to close your business and what facts should be considered.

Closing a Business Tax Implications – Considerable Facts

The type of organization you are closing largely determines the tax implications of closing or dissolving a business. You can get a general idea of your responsibilities by reading the summary of the tax repercussions of closing a business by the types given below. There are several options for paying final taxes. Let’s take a look below:

For USA Business:

Sole Proprietorship

There are a few tax implications of closing a sole proprietorship. For the year in which they go out of business, sole proprietors must file Schedule C (Form 1040 or Form 1040-SR), Profit or Loss From Business, along with their Form 1040, U.S. Individual Income Tax Return, or Form 1040-SR, US Tax Return for Seniors.

C-Corp

IRC Section 331 taxes are liquidating distributions to corporate shareholders from the dissolution of the business. C-Corporations are subject to “double taxation,” which means that the corporation itself is obligated to pay taxes on assets distributed to shareholders. The resulting gains or losses are taxed on the shareholders’ personal income tax returns.

S-Corp

S-corporations are typically taxed as “pass-through” entities. This means that the company’s profits and losses are reported on the tax returns of individual shareholders. These distribution rules, however, do not apply to liquidating distributions. When an S-Corp shuts down, it has to follow the same tax rules that apply to how C-Corp assets are distributed. In other words, the corporate entity and its shareholders must account for dissolution gains and losses.

LLC

LLC income is “passed through” to its shareholders as either sole proprietorship income (the default when the LLC has only one member) or partnership income. During the process of closing down the business, this tax treatment will remain the same. This means that each LLC member is responsible for reporting their share of the company’s distributed assets and their share of its gains or losses in its final tax period.

Nonprofit

Federal law mandates that dissolved nonprofits only transfer any remaining assets to another tax-exempt organization. If the nonprofit meets these requirements and continues to operate under IRS rules governing charitable organizations during its final tax period, there will generally be no income tax payments owed to the federal government upon dissolution.

For UK Business:

Sole Trader

You must let HM Revenue and Customs (HMRC) know if you are no longer a sole trader or if you are ending or leaving a business partnership.

You must also file your final tax return. If you decide to stop being self-employed because you won’t make more than £1,000, let HMRC know that you quit on April 5 (the end of the tax year). If you stop being a sole trader or leave a business partnership, you must submit a self-assessment tax return before the deadline.

Partnership

If you sell all or part of your interest in a partnership asset, you must calculate any chargeable gain and enter it in your Capital Gains Tax summary pages. Remember, you are treated as owning a portion of the partnership assets.

You can get that kind of interest when:

  • An asset is obtained from a source other than the partnership.
  • The partnership is undergoing reorganization.

You can dispose of that interest when:

  • An asset is sold to someone outside the partnership.
  • The partnership is undergoing reorganization.

Ltd

Even if your company is in the process of being wound up, it is still subject to corporation tax payment and filing requirements.

For Corporation Tax purposes, the winding up of your company usually begins on whichever comes first-

  • Your company’s shareholders vote to dissolve it by passing a winding-up resolution.
  • The court issues a winding-up order against your company.
  • A liquidator has been appointed.

Your company must continue to file a Company Tax Return and pay Corporation Tax on taxable profits derived from the following sources:

  • Other types of income include trading income and investment income.
  • Selling other goods or assets (chargeable gains) to pay off debts, for example.

During the winding-up period, your company will pay Corporation Tax at the same rates as before the winding-up period began.

Benefits of Closing a Business

The first and most important advantage of a company ceasing operations after reaching a shutdown point is that it avoids losing money during ongoing production. It also allows management to reconsider future business prospects and current company procedures.

  • Relatively Low Cost: Closing a business is a low-cost option. A company dissolution will not cost you much money or time. The costs of preparing a Statement of Affairs and holding a creditors’ meeting must be covered by company directors. Still, aside from those initial expenses, there may be little to fund because professional fees are paid from the sale of company assets as long as these are sufficient.
    To initiate the Statement of Affairs and the creditors’ meeting, you must hire a professional firm of insolvency practitioners.

  • It Is Simple: The directors themselves can oversee the dissolution process. An insolvency practitioner cannot oversee matters or investigate directors’ conduct automatically.

  • Straightforward: Company dissolution is relatively straightforward to complete fully.

  • Legal Proceedings Are Halted: When a company goes into dissolution or liquidation, any legal action taken against it is halted. Creditors cannot take action against you as long as you have no personal liability for company debt.

  • Employees Can Get Redundancy Pay If: The liquidator lays off employees, and if they are eligible, they can file a claim for redundancy pay and other statutory entitlements. If the money from selling the company’s assets isn’t enough to cover the redundancy payments, employees have another way to get their money back. When a company cannot pay for redundancy, unpaid wages, or holiday pay with its funds, the National Insurance Fund steps in.

  • Leases Can Be Canceled: Lease and hire purchase agreements typically terminate at the date of liquidation, implying that no further payments are required. If any arrears are owed, the company leasing the goods and other creditors may be able to claim from the insolvency practitioners. Personal guarantees are frequently given upon signing a property lease agreement; you should carefully review your documentation to determine whether you will be held personally liable for the remainder of the lease.

  • Court Processes Can Be Avoided: If you decide to liquidate the company on your own, you can avoid being petitioned through the courts and show the public that the liquidation was a company decision and not the result of an angry creditor.

Disadvantages of Closing a Business

Now that we’ve discussed some advantages of company dissolution, let’s discuss the disadvantages of closing your company.

  • The company will be unable to trade and will almost certainly be prohibited from using the same or a similar company name in the future.

  • Employees and directors will all lose their jobs.

  • Shareholders might have to pay back dividends that were given out of money that wasn’t made.

  • Directors will have to pay back any overdrawn loan accounts.

  • Both suppliers and creditors will lose money.

  • Any valuable business assets, such as a good name, a trading license, or other assets, will be lost.

  • The administration might be faster and give creditors a better result.

  • Any tax losses that have been saved up will be lost and can’t be gotten back.

  • Any debts you backed (like Funding Circle) will be called in.

  • A business’s dissolution usually doesn’t hurt the credit score of the people who run it. However, the information will still be available on Companies House. 

  • You can make claims for time off.

7 Signs of Why and When to Close Your Business

There are a few times when you should take the drastic step of closing your company. 7 Signs that indicate when to close your business are given below:

  1. When Your Company Is Insolvent And Cannot Repay Its Debts
    A company becomes insolvent when its liabilities weigh down its assets, and some debts cannot be paid while they are due. Suppose this happens, and there’s no reasonable way of alleviating the situation by paying the debt and keeping the company open. In that case, you could be better off closing the company voluntarily rather than waiting for the shareholders/creditors to initiate the termination process.
      
    Although, as a director, you could feel driven to try and keep the company open, this could cause harm if the company continues trading without taking the necessary action to improve the debt situation. Then there’s the matter of the liquidator. You could face severe consequences once a liquidator intervenes. All of these could include an investigation for insolvent trading or even fraud if a liquidator calls your actions as a director into question. 

    So, you should take proper action to prevent this situation. Or do something to alleviate the debts. And you can continue with your business without a hitch. But if the situation stays the same, closing the company as soon as possible would be wise.

  2. When Average Marginal Revenue Drops Below Average Variable Costs
    You should close your company when the company’s or business’s average marginal revenue drops below average variable costs. A company might reach its breaking point for various reasons. That could be between standard diminishing marginal returns and declining market prices for its merchandise. If the company faces continuous losses, there’s no point in holding on to it.

  3. When The Business Fails
    You could have faced business failure. Like poor location, lack of expertise, poor management, insufficient capital, unexpected growth, personal use of funds, over-investing in fixed assets, and poor credit arrangements. These things will eventually lead you to business failure. We hope you overcome it. But if you can not, the closing down option could be wise to consider.

  4. When Debt Relief Attempts Have Failed
    Sometimes only debt alleviation is not enough to save the day or, in that case, the company. Because the debt volume could be so low, repayments and restructuring action wouldn’t be fruitful or reasonable. Or maybe your creditors could have pursued liquidation action to force the company into compulsory liquidation.

    If there are possibilities of this happening, you would be better off closing the company voluntarily through a process called a CVL, or Creditors Voluntary Liquidation. This process lets directors close a bankrupt or collapsed company voluntarily and formally. Directors often choose CVL to take control in the face of continued creditor pressure and the forthcoming Winding-up petition. This process allows the company to close in a more orderly manner than compulsory or forced liquidation. And the directors can have more control over the whole process.

  5. When the Company Has No Future
    If your company has no future or has outgrown you, you should close it. Otherwise, you must pay annual fees and other taxes without any reason. If you don’t, there are various consequences for you to face. Which maybe you aren’t ready for. When this kind of situation arises, approach a licensed insolvency practitioner to apply for an MVL or Member Voluntary Liquidation.
    The service includes selling company assets, then paying the liquidator’s fees using the money, and if there are any remaining creditors, they will be paid too. Any funds left are then distributed to the company’s shareholders.

  6. When Your Business Has Outgrown You, Or You Have Outgrown Your Business
    Your business has outgrown you, or it could happen that you hired well, and they outperformed your expectations. They are moving the business forward in ways you wouldn’t have thought of. They are doing more and more practical work for the company than you; new clients and opportunities are coming to the business from all angles. Everything is just excellent. But they don’t excite you like they once would or did. That means your business has outgrown you.

    In another case, you know your business well. And the knowing part is at that level where you can operate the business even in your sleep. It’s impressive, but maybe it means you have outgrown your business. Now you are ready for new challenges and to explore more.

    In both cases, you should do one or two tricks. In the first situation, upgrade yourself if the business has outgrown you. Then you can keep up with it. For the second one, upgrade your business. Add something up-to-date that will excite you and give you brand-new challenges you are ready for. Then the business can keep up with you. And if nothing works, then it’s time to move on.


  7. When Your Industry Is Shrinking or Sinking
    If your industry is shrinking and your company is drowning gradually like a sinking ship and not giving you the desired result or output, then it’s wise just to sell or dissolve it. And then move on. Try something new. Something that will excite you and give you fruitful results. Something that will keep up with you, your dreams, and your ambitions.
close your company
7 Signs of Why and When You Should Close Your Company

Last But Not Least

Still, you may instinctively want to keep your company open, but you might be in a situation where it’s better to close the business and walk away. You can explore whatever options are open to you. Have a fresh and new beginning. Think from the very start.

You can try to relieve the debt situation and make your business operational again. But if the debts are at such a level that relieving them will prove futile, you better understand when to close your business yourself. For an easier way, you can always check out our blog, “6 Easy Steps to Close Your Business.” Then you’ll have more control over the closure and reduce the risk of severe consequences.

Think wisely and logically!

Related Post