At some point, the companies need to decide to close the company. There could be reasons behind this decision. At some point, public service companies need to make this decision in the future. But the main aim is to adopt a way in which you can extract more profit even if the company is closing. The closing of a company could be a challenging task. But you can read a complete guide on this topic here.
What Are The Retained Profits?
There is no doubt that closing an established company is a complex task; that’s why you must prepare your business for the crisis. We need to understand this term if you want to wind up a company with retained profits.
“Retained profit is an amount left behind after paying the dividends to its shareholders.”
Usually, the companies keep this fund for growth as financial airbags. Apart from this, there is another reason why people use this fund. The retained companies don’t transfer retained funds to themselves because they will have to pay tax in this case. But when the company is closed, you must share these funds with the shareholders. However, in this situation, it’s crucial to find an efficient way to close the company, reduce the tax bills and extract more profit.
Ways to close a limited company:
There are more than 4.7 million registered companies in the UK, and only 2 million are actively trading. After setting up a business, you should be smart enough to extract profits so that you will have to pay fewer taxes. However, there are five top ways that you can adopt to close a limited company:
- Creditors’ voluntary liquidation of an insolvent company that a director starts
- Members’ voluntary liquidation when they want to extract wealth
- Compulsory liquidation occurs when creditors start court actions against the company
- Cease trading
- Dissolve the business if the company satisfies the requirements
When you need to close a company, all assets must be realized, and creditors must be paid. However, the company will have a detailed balance sheet reflecting the retained earnings and share capital after doing this.
What Is The Best Way To Close Your Company?
There could be many reasons why you can end your company. If you are a beginner, then learn more or seek professional advice. Here are the following reasons to close a business:
- If the business is no more profitable
- You are taking a permanent role as an employee
- You have decided to retire
- There are lifestyle reasons
- Or limited liability structure doesn’t suit you from a tax or admin point of view.
But the two most profitable ways are MVL and voluntary strike-off. Most experts recommend MVL for winding up a solvent company.
Members’ voluntary liquidation (MVL):
We adopt a formal process to win up a solvent company. Solvency is a condition when a company has more assets than liabilities. A member’s voluntary liquidation company distributes capital gains to the shareholders instead of taking out retained profit as a final dividend. However, this way, the tax bill will be much lower, and you can qualify for an entrepreneur’s relief. But if you decide to liquidate your company with the help of a licensed insolvency practitioner, then the remaining amount will be distributed as capital gains tax.
Benefits & cons of choosing MVL:
Earlier, we discussed that using an entrepreneur’s relief fund is one of the most significant benefits of using MVL. In this way, you will have to pay CGT at the rate of just10% on assets that qualify. Besides, here are other benefits of using MVL:
|More tax efficient
|The process completion can take longer
|If retained profits are large, then this method is best
|You will pay an insolvency practitioner
Besides, there are things you need to do before initiating the process. For instance, the file accounts should be updated, all creditors are paid, physical assets disposed of, and outstanding charges are satisfied. In addition, make sure the final VAT and corporation tax returns are submitted.
How To Extract Profits From Your Company?
You are liable to pay corporation tax at 19% if you have a limited company. After deduction, the remaining profits will be distributed to shareholders and directors. There are many ways to extract profits earned by the company. However, combining all these methods is an excellent strategy to extract profits and avoid paying more taxes than you need.
Pay yourself a small salary:
Most business owners ignore their bank accounts if they run a limited liability company. Please pay yourself a basic salary. You can enjoy the benefits without suffering if your salary is less than a specific limit. The introductory income tax rate doesn’t apply if you earn less than the mentioned limit. However, the basic wage will appear in the paystub and be considered a business expense in business books. This way, you can reduce the taxable profits and lower your company’s corporation taxes.
Shareholders receive the dividends from the company’s income after paying corporation tax. In a limited liability company, the director is the sole shareholder and pays himself a combination of salary and dividends. But it would be best if you showed that you have profit reserves before issuing the dividends. The dividends fall under a different taxable category in comparison to salary.
Contribute to pension funds:
A company can pay the pension personally and by the company. This way, you get the benefits of saving for retirement and pension contributions. The pension payments can reduce the higher tax rate incurred on the company’s profits.
Director’s fee & capital distribution:
Apart from this, the limited liability company is entitled to take a director’s fee like salary. In this way, you can save the maximum amount of tax. Apart from this, capital distribution is another way that is tax efficient. Capital distribution is taxed the same way as capital gains.
Note: The main goal is to reduce taxes by extracting more profits before winding up the company. You can use different tricks to minimize business expenses as they are non-taxable. So, keep an accurate record of costs if you want to claim tax relief and reduce the company’s end-year profits.