We can call a company inactive when it isn't currently running any business and doesn't have other income sources such as investment income.
There are several reasons for a business to become dormant. A company can become dormant as soon as its establishment, or an existing company could go into dormancy.
But, the term "dormant" could mean different things according to your viewpoint. For example, a business is dormant to be tax-efficient; however, it might not conform to the stricter definition used by Companies House.
Understanding the exact dormant company meaning is vital.
Did you know?
12.59 lakh private limited companies registered in India had "active status" as of January 31, 2021. Till December 31, 2019, the number didn't even touch 11 lacs. In the same year, 7.15 lacs were filed for the same.
Also Read:What is a Small Company - Definition, Criteria, Examples
What Is the Dormant Company Companies Act?
According to the Companies Act of 2013, a Company or an Inactive Company that has not made any significant accounting transactions and was formed and registered for a future endeavour or to be retained as an asset or intellectual property can apply to the Registrar in a prescribed manner to attain the status of a Dormant Company. A dormant business:
- Can apply to return to an active corporation status.
- A corporation cannot be classified as dormant for longer than five financial years.
A Dormant Company’s Definition
Let's catch up with the dormant company example first.
A company is dormant when it doesn't currently carry on any business activity or receive income.
The explanation for the reasons of the section:
- "Inactive company" means a business that is not conducting any operations. It shouldn't have made any accounting transactions of significant importance within the last two fiscal years. Also, it shouldn't have prepared financial statements or annual returns over the previous two years of financial reporting;
- Allotment of shares that meets the provisions of this act
- Payments of fees by a business to the Registrar
- The payments made by it meet the obligations of the act and any applicable law
- Payments to maintain the office and its documents.
Thus, any company which wants to remain an asset business or has no major business ventures could apply to become an inactive company.
How Do You Get Your Dormant Company Active?
If you choose to join an active business, you'll need to contact HMRC before the end of three months from the start of income or activity in your business. If you've been trading previously, you can renew your registration. It will be active in Corporation Tax via your HMRC online account.
Also, if you're a newly-established business that will be trading as a limited company this first time, you'll need to set up the HMRC on the internet. Then you'll have to register to pay Corporation Tax using your Unique Taxpayer Reference. To accomplish this, you need to create your Government Gateway ID on the government website and supply HMRC using the following information:
- Registration number of the company
- Address of the company
- Trading start date
- Company name
- The nature of business
- Accounting reference date
After you've registered your company to pay Corporation Tax, you must submit your accounts for tax purposes. Submission is necessary to Companies House within nine months of the year-end for your business. You should be able to pay the Corporation Tax due within nine months. Also, one day after the year-end of your business.
Notifying the Companies House that you have re-activated your dormant business is unnecessary, and it will be apparent when you file your annual tax return.
Also Read:Private Limited Company vs Public Limited Company
How Can You Make Your Business Go Into Dormancy?
After you choose to put your business dormant, you must shut down the business activities and stop all transactions. In closing the business bank account, you must pay off all outstanding and unpaid expenses and any funds owed to staff directors, shareholders and suppliers.
This will prevent you from initiating any transactions which could disrupt your dormant status. To switch the state of your business between active and dormant, you must contact the local Corporation Tax Office in writing or via phone. You must state the date that your business became (or you expect it to be) dormant.
HMRC will then issue you a notice to deliver an annual tax return for companies to cover your business time before the time you shut down your company. Your responsibility is to fill out and file the form and pay any due tax.
The confirmation of your inactive status typically takes about three weeks. If your business has VAT registration and you do not intend to trade in the future, you must cancel your VAT registration in the first 30 days after going dormant.
If you intend to continue trading, it is possible to make a 'nil' VAT return' to ensure that your VAT status is active. This is easier than re-registering your business when it gets active. Since you still have to send confirmation statements, there's no need to inform Companies House of your intention to put your business in a state of dormancy. Also, don't start investing before making a perfect business plan to attain success.
The Eligibility to Register as a Dormant Company
After knowing about what is a dormant company, let's see the eligibility. A company can be eligible to apply for and transform into dormant. However, the following requirements are necessary that you must meet:
- The company does not have any deposits in the public sector. They are not paid nor are in default of the paying interest or other payments;
- There is no inspection, investigation or inquiry conducted/requested against the firm.
- There is no prosecution initiated (or is pending) against the business under any law.
- The company does not have any outstanding loans, either secured/or unsecured. The company can apply for an outstanding unsecured loan under this rule only after receiving the approval from the lender and attaching the loan to the MSC-1 form.
- The company has not defaulted on the payment of the workers' dues.
- There is no disagreement in the ownership or management of the company.
- The company is not in the process of paying any statutory due taxes, duties, etc. These are due in the name of authorities such as any local, state, governmental authorities or Central Government.
- You cannot list the company's securities on any exchange in or outside of India.
Your Obligations as an Owner of a Dormant Company
Does a dormant company have expenses?
In general, there is a no.
To keep a company inactive, you must avoid expenses from a company bank account to prevent large accounting transactions.
The focus of HMRC on not trading can allow you to pay certain expenses without conducting business. The Companies House rules prohibit any commercial transaction.
This includes paying salary, professional and legal charges, issuing dividends, bank fees, property costs and the purchase/sale of goods/services.
However, if your company is not active, there are no expenses. Being a director could mean having to pay some costs.
How Can You Avoid Incurring Costs?
Due to stringent regulations, keeping a dormant company may be like walking on a tightrope.
It could be best to shut down all business accounts with your company to reduce the risk of getting into the hands of Companies House and HMRC. This will remove any doubts about your company.
If you'd like to begin trading in the future, opening an account is easy. You can establish a bank account for your business in just a few minutes. After that, you can experience the advantages of consolidating your company's finances into one location.
When your company is not in operation, you can finance the incorporation costs through an individual account, such as professional and legal costs.
Before you reach out to your bank to end an account for business, ensure that you settle all accounts or charges and remove the standing orders and direct debits.
It is also possible to inform your suppliers that there will be no further transactions to be processed through the account.
In case your company is not in operation, it gives you the possibility of keeping the name on the market domain without the hassle of managing a business. This also assures you that it's easy to take over the company under a name you already have if you decide to trade.
Suppose there's no evidence that your business is in the process of trading or has significant accounting transactions appear on your books. In that case, you'll be able to remain inactive until it meets your requirements. If you want to keep all debit and credit calculations easily accessible, Khatabook is the best platform.
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