Did you realize that nearly 600,000 businesses are launched annually in the United States? When a business shuts down, owners often face a difficult choice: should they mark the business as dormant or pursue a strike off? From my experience, I have guided a number of business owners through the complexities of this decision. Both options present their own advantages and disadvantages. The optimal path depends heavily on the particular circumstances and a forward looking view. Let us examine the dormant versus strike off question. I will outline the benefits, drawbacks and expenses associated with each. My aim is to provide a detailed comparison to help you make an informed decision.
What Exactly Is a Dormant Company?
A dormant company is, at its core, a business that is temporarily inactive. It is not actively conducting trade or generating revenue. However, this does not mean its end. It is simply pausing operations. A company might become dormant for various reasons. The principals might need to take some time off, reorganize the company or plan for a future venture. Regardless of the reason, dormancy allows the company to maintain its legal status and assets without the responsibilities of an active business.
What Advantages Does Dormancy Offer?
- Preserving the Company Name and Registration: A significant advantage is the ability to retain the company registration. This is especially important if the company name has substantial brand recognition.
- Easy Reactivation: A dormant company can be revived relatively easily when market conditions improve. This bypasses the challenges of establishing a completely new company.
- Asset Protection: Existing assets, such as intellectual property or real estate, remain under the company’s ownership.
- Reduced Compliance Burden: Some reporting obligations still exist. Compliance requirements for a dormant company are substantially less burdensome than those for an active one.
What Are the Downsides to Dormancy?
- Continuing Compliance Obligations: Even in a dormant state, a company is still required to file annual accounts, even simplified ones, and confirm its registered office and director details with the appropriate authorities.
- Potential Costs: There will be some expenses linked to filing accounts and maintaining the registered office, however minimal.
- Risk of Involuntary Strike Off: Failure to adhere to compliance mandates may prompt authorities to begin the strike off procedure, ultimately leading to the company’s dissolution.
What Expenses Are Associated with Dormancy?
The expenses tied to dormancy are typically modest. They generally include:
- Accountancy Fees: These are the fees for preparing and submitting dormant company accounts. They can range from a nominal fee to hundreds of dollars. The exact cost depends on the complexity involved and the accountant’s fees.
- Registered Office Fees: If using a registered office service, an annual fee will be incurred.
What Is Meant by a Strike Off (Dissolution)?
A strike off, also called dissolution, involves removing a company from the official registry. This effectively ends the company’s legal existence. Once dissolved, all assets the company held become the property of the state. A strike off represents a more decisive action than dormancy. It is generally selected when there is no intention to reactivate the company.
What Are the Advantages of a Strike Off?
- Complete Termination of Compliance: Once the company is struck off, all compliance obligations cease.
- Simplicity: The strike off process is relatively straightforward.
- A Clean Break: It provides a clean break, which is particularly beneficial if the company has outstanding debts that are not being actively pursued.
What Are the Disadvantages of a Strike Off?
- Loss of Company Name and Registration: The company name becomes available for anyone to register.
- Asset Forfeiture: All assets, including cash, real estate and intellectual property, revert to the state.
- Difficult Reinstatement: Reinstating a company after a strike off is challenging and costly. It requires a court order.
- Potential Investigation: Evidence of wrongdoing or outstanding debts can trigger investigations of the company’s directors, even after the company has been struck off.
What Expenses Are Involved with a Strike Off?
The expenses linked to a strike off are minimal:
- Application Fee: Authorities impose a fee for submitting a voluntary strike off application.
- Potential Accountancy Fees: Fees might be incurred for preparing final accounts before applying for a strike off.
Dormant versus Strike Off: A Detailed Comparison
A primary distinction between a dormant company and a strike off lies in the intent and future plans for the business. The decision of Dormant vs Strike Off and understanding the Difference Between Dormant Company and Strike Off is paramount.
What Is the Underlying Intent?
- Dormant: Signifies temporary inactivity, with the potential for reactivation at a future date.
- Strike Off: Signifies a permanent cessation of business operations.
What About Compliance Requirements?
- Dormant: Necessitates continuing compliance, which includes submitting annual accounts.
- Strike Off: Terminates compliance requirements once the company is dissolved.
Who Retains Ownership of the Assets?
- Dormant: The company maintains ownership of its assets.
- Strike Off: All assets are transferred to the state.
How Difficult Is Reactivation?
- Dormant: Reactivating the company is relatively straightforward.
- Strike Off: Restoring the company to the register is both difficult and expensive.
Dormancy becomes an appealing option when:
- Future Intentions: There exists a realistic possibility of reactivating the company sometime later.
- Asset Value: The company possesses valuable assets that the owners intend to retain.
- Brand Recognition: The company name carries significance and the owners wish to prevent others from using it.
When Should You Opt for a Strike Off?
Strike off is most appropriate when:
- No Future Intentions: There are no plans to ever reactivate the company.
- Limited Assets: The company has few or no assets.
- Desire for a Clean Break: The owners desire a complete break and an end to all compliance responsibilities.
What Is the Application Procedure?
Dormancy
Declaring a company dormant relies more on actions taken than on formal applications. The company ceases trading and then submits dormant company accounts. Informing the tax authorities that trading has stopped is critical to avoid unnecessary tax assessments. I have personally been through this. It usually requires a simple phone call.
Strike Off
Striking off a company entails these actions:
- Verify Eligibility: The company must not have engaged in trading within the preceding three months and must not be involved in any legal disputes.
- Inform Interested Parties: Notify all creditors, employees, shareholders and relevant parties regarding the planned strike off.
- Submit Application to Authorities: Complete and submit the application to strike off the company from the register, along with the required fee.
- Public Notification: Authorities will issue a notification regarding the planned strike off.
- Absence of Objections: If no objections are received, authorities will strike off the company.
What Potential Issues Exist and How Can They Be Avoided?
Selecting the incorrect option can lead to negative consequences. Consider these potential issues:
What Complications Could Arise with Dormancy?
- Compliance Failures: Neglecting to file annual accounts or notify authorities about changes may result in penalties or the company being involuntarily struck off.
- Unexpected Trading Activity: Any trading activity, regardless of how minor, can negate the company’s dormant status.
What Complications Could Arise with Strike Off?
- Undisclosed Assets: Failing to disclose all assets before striking off the company can create legal issues.
- Unpaid Obligations: Creditors can object to the strike off and request that the company be restored to the register to recover amounts owed.
- Improper Conduct: Evidence of wrongdoing, such as fraud, can result in investigations of the directors, even after the company has been struck off.
To mitigate these issues, seek guidance from an accountant or lawyer before deciding. The keywords Dormant vs Strike Off are important to bear in mind.
What Are the Final Thoughts?
Deciding between dormant versus strike off is crucial when a company ceases trading. I have come to understand that a comprehensive understanding of each option and careful consideration of long term intentions, assets and compliance capabilities is essential. I strongly advise obtaining professional advice to ensure you make the optimal decision for your situation, resulting in a compliant and seamless transition. A clear grasp of the Difference Between Dormant Company and Strike Off is vital for informed decision making. Dormant vs Strike Off is a key consideration.
