When a business has ceased trading, it may mean they've usually laid off employees, sold the company's assets, and potentially become liquidated and removed from the Companies House register.
There are many reasons why a business may cease trading, such as a retiring director or simply because the company serves no further purpose.
In this article, you'll learn all about ceasing trading and why some companies choose to cease trading.
What Is Ceased Trading?
Cease trading is a phrase used to describe a business that is no longer trading.
So, there will no longer be goods or services, employees are usually made redundant, business assets are sold, and some companies cease to be legal entities afterwards.
Liquidation is occasionally interchangeable with ceased trading, but not all ended trading companies have been liquidised. The liquidation process refers to when a company stops doing business and ceases to exist; all of the assets that belong to the company are used to pay creditors, and any remaining money is left to shareholders.
What Happens When a Limited Company Ceases Trading?
When a business decides to close its doors forever, it doesn't cease trading immediately.
There are several preparation tasks the director has to do first, such as informing HMRC through the local corporation tax office and essential governing bodies.
There is a lot to do to prepare to cease trading. Depending on the reasoning behind the cessation of trading, a licensed insolvency practitioner may need to be hired if you're closing a solvent or insolvent company.
When a ceased trading occurs to a business, there are multiple parties impacted, such as:
- Employees: When a company has ceased trading, it makes all employees redundant. The company likely can't afford to pay wages and is forced to let their staff go.
- Shareholders: Any investors or shareholders in the business's assets, the value holdings will likely become worthless or diminish.
- Company's creditors: If you hire a licensed insolvency practitioner who can deal with creditors. However, credits may initiate legal action to recover funds.
All involved parties must be informed of the situation by the business and final accounts prepared. A company tax return will need to be completed, as well as any company's debts paid off and owed money returned, and then the business will close down.
Depending on how the company director decides to close the business, they could make a limited company dormant so it is still a legal entity; this means if the company's directors choose to continue trading later, they can. Otherwise, they could close the business with the Companies House register to release the company's name so it ceases to exist.
Why May a Company Cease Trading?
There are a plethora of reasons why a company ceases trading, but to gain a more comprehensive understanding of why it happens, we've compiled a list of the potential reasons:
- A sole director may have other plans that don't involve running a business, like retiring and not having anyone to carry on the business.
- If there are multiple company directors, there may be disagreements on running business operations, or they've come to a standstill where they can't move forward, so they may all choose to walk away.
- Perhaps it became an insolvent company, and the directors struggled to save the business. An insolvent business can be challenging to maintain, and a formal insolvency procedure must occur.
- If a business can't afford to pay creditors, it may face compulsory liquidation, which means it's not by the choice of the company's director.
How Does a Company Cease Trading?
You may have come to this article to learn how to start the process of ending your business, or perhaps you're just curious about the process.
Either way, we've compiled a step-by-step guide on how a company can cease trading:
- Make a formal decision: The company's directors and shareholders must decide to stop the business jointly. All decisions should be communicated clearly to all relevant parties, like stakeholders and anyone else invested in the business. Document all decision-making.
- Notify all necessary parties: Notify anyone involved with the business of the closure, including employees, suppliers, and customers. Outline the closure information and inform each party how it will affect them and their position with the business.
- Settle outstanding debts: If the business has any outstanding liabilities, they need to be prioritised, for example, paying debts to suppliers, tax authorities, and creditors to fulfil all financial obligations before closing operations. If outstanding debts and liabilities aren't paid, they could become the director's personal liability issues.
- Close accounts: Terminate all business accounts. So, all subscription services, merchant accounts, and business bank accounts must be closed.
- Inform Government bodies: All relevant government bodies, such as Companies House, must be informed about the business's decision to cease trading. Informing officials includes fulfilling regulatory requirements and submitting appropriate documentation.
- Finalise tax matters: Complete the final tax return to meet tax obligations and address any outstanding tax liabilities.
- Distribute company assets: After settling liabilities and debts, distribute any remaining funds or assets amongst shareholders.
- Legal documentation: To formally close the company, the company director(s) must complete and submit legal documentation such as forms, declarations and resolutions.
Final Thoughts
If you, or someone you know, is considering ceasing trading, you should reach out to a financial adviser first to ensure it's the right choice.
Ceasing trading is a big decision. If you'd like to return to the business someday, temporarily end services and inform all the necessary parties. If you're moving on to your next adventure, closing the company so it no longer exists may give you the peace of mind you need.
