A dormant company is one that doesn’t trade and has no accounting transactions.
There are two main situations where owning a dormant limited company can be useful for start-ups and small business owners;
1. Protecting your interests if you are a business operating as a sole trader, or are thinking of becoming self employed.
2. Preserving your limited company, if you are stopping trading for a period of time.
Dormant companies can also be used to hold an asset, such as a freehold property. However this purpose is of limited relevance to small business owners, so it will not be covered in this guide.
1. Using a dormant limited company to protect your sole trader business
The most popular reason for owning a dormant company is to protect your business when you are operating as a sole trader (also commonly referred to as being self-employed).
Operating as a sole trader offers small business owners several advantages over the limited company route. It’s generally simpler and cheaper to run your business as a sole trader, so it’s no surprise the majority of new business start-ups choose to take the plunge with this business structure.
However, if you are a sole trader, unless you have trademarked your business name, there is nothing stopping anybody else from registering the limited company of the same name.
Limiting reputational damage
For example, you may have a consultancy business trading as, “First Point Consultants” which you’ve spent many years building up and carving out a great reputation for.
Then one day you find that a new business called “First Point Consultants Ltd” is operating, but it’s developed a poor reputation. There’s a big risk that potential customers might confuse the two businesses and your business could be damaged.
This is an increasingly important factor these days, as more and more potential customers use the internet to find you. If they come across a few bad reviews for “First Point Consultants Ltd” you could miss out on valuable new business.
Protect your business by buying an ‘off the shelf’ company
Buying an, ‘off the shelf’ dormant company called, “First Point Consultants Ltd” will prevent competitors from using, and potentially damaging, your hard-won business reputation.
Some company formation agents provide the facility for you to buy a company specifically for this purpose. ByteStart’s company formation partner offers such a service online, where you can ‘reserve a company name’ in a matter of minutes. That company name is yours, as long as you pay the annual fee, preventing anybody else from using it,
2. Preserving your limited company, if you are stopping trading for a period of time
Another situation where a dormant company may be useful is if you have already been operating as a limited company, but you are stopping trading for a period of time.
For example, you may have been running a successful company but are moving overseas for a few years. In this instance, you might want to keep your company going so you can restart it when you return to the UK.
The main drawback of keeping your company going is that limited companies are required to file full company accounts to Companies House every year and the cost of paying an accountant to produce and submit these accounts will be significant.
By making your limited company dormant, you can avoid much of the cost of maintaining your company, and you won’t need to go through the administrative process of closing down your limited company.
Your accountant will advise you on precisely how to make your company dormant.
What is a dormant company?
The rules on what constitutes a dormant company are strict. However, Companies House and HMRC have a slightly different interpretation of the term ‘dormant’. Companies House defines a company as being dormant,
“…if it has had no ‘significant accounting transactions’ during the accounting period. A ‘significant accounting transaction’ is one which the company should enter in its accounting records.”
The only allowed transactions of a dormant company are:
- Payment for shares taken by subscribers to the memorandum of association
- Fees paid to the Registrar of Companies for a change of company name, the re-registration of a company and filing annual returns; and
- Payment of a civil penalty for late filing of accounts.
HMRC’s definition of a dormant company is,
“… a company that’s not active, not liable for Corporation Tax or not within the charge to Corporation Tax.”
HMRC consider the following examples to be ‘dormant companies’:
- A new company that hasn’t begun trading yet
- An ‘off-the-shelf’ company held by a company formation agent ready to be sold on
- An existing company that has traded in the past, but is not currently trading
- A company that will never trade because it has been formed solely to hold an asset such as property.
If you intend to make your company dormant, you should contact your Corporation Tax Office.
How long can a company remain dormant?
There is no time limit for keeping a company in a dormant status. However, the directors must still perform the following administrative duties each year:
Dormant company accounts
All dormant companies, even those who have not traded, must file annual accounts at Companies House. However, the big advantage of being dormant is that you don’t need to provide as much information as you do for an active company.
Accounts for a dormant company need only include the following;
- A balance sheet containing certain statements above the director’s signature and their printed name confirming the company was dormant for the entire accounting period
- Any previous accounting year’s figures for comparison purposes; and
- Certain notes to the balance sheet.
Dormant companies that have never traded, can file their annual accounts online using the Companies House WebFiling service.
It’s preferable to submit online as the system contains checks to ensure you provide all the necessary information, including the specific statements required on the balance sheet. However, you can submit the accounts on paper with Form AA02, which you can download here.
Companies who have traded in the past, but have become dormant may be able to use Form AA02 (DCA), but only if no transactions have been recorded in the current financial year and no residual balances exist.
During this time, the company must not generate any transactions at all, otherwise you will have to submit full accounts to Companies House, and meet any liabilities these transactions may create.
Administration of a dormant company
Even though your company may be dormant, you are still required to file a Confirmation Statement which includes a Persons with Significant Control (PSC) register every year. This costs £15 if you file online, or £30 if you file a paper return.
If you decide to appoint a Company Secretary, Director, or need to change the details of any of these officers while the company is dormant, you must notify Companies House. The same goes for any change of registered address. You can submit any of these changes online with the WebFiling service, or with the relevant Paper Form.
Penalties for failing to submit documents to Companies House
Directors can be prosecuted if they don’t submit documents to Companies House on time. In fact, failure to do so is a criminal offence.
There is also an automatic civil penalty for late submission of annual accounts. In severe cases, a dormant company could even be struck off the register.
More information on limited companies and business structures
Gov.UK have a comprehensive guide to filing annual returns and accounts for UK-registered companies on their website here.
Other relevant ByteStart guides to starting a business and setting up a limited company include;
- 10 advantages running your business as a limited company has over being a sole trader
- How to set up a limited company
- What is a sole trader?
- Which business structure should you choose for your new business – sole trader, limited company, partnership or LLP?
- 5 things you must do when you go self employed
More on starting and running your own business
ByteStart is packed with help and tips on all aspects of starting and running a small business. Check out some of our most popular guides;
- 10 Do’s and Don’ts of writing a business plan
- How to choose the best online accounting software for your new business
- How to create business cards that make a big impression
- ByteStart’s 60-second guide to Value Added Tax (VAT) for start-ups and small businesses
- Which types of insurance must your business have?
Funding your business
- How to maximise your chances of securing a small business loan
- A Guide to ‘Alternative Finance’ – the new funding options for startups and small businesses
- Finding finance for your new business – funding advice for start-ups
- 10 Top tips to ensure your crowdfunding efforts are rewarded
- What to do when the bank says “NO”!
Money & Tax matters
- 10 ways small business owners can pay less tax
- Sole trader tax – a guide for start-ups and the newly self employed
- Dividend tax changes from April 2016 – A summary of the financial effects for small business owners
- ByteStart’s Guide to the main business taxes
- Corporation Tax – How to reduce your bill
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- Making your small business a BIG hit online – A Digital marketing guide for small business owners
- 7 Brilliant branding tips for start-ups
- The “Magic 10” Tips on networking – how the experts build great networks
- How to attract customers from heaven – not clients from hell!
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- Becoming an employer – Your responsibilities when you hire staff
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- A Guide to the National Living Wage for small business owners
- Why it’s vital you have clear ‘Terms & Conditions’ for your business