Disadvantages of Dormant Company: Need to Know

A dormant company is a business that’s registered with Companies House and HMRC but doesn’t do any trading/business. Some people might set up a dormant company for different reasons, like protecting a business name, holding onto an asset, or getting ready for a future project.

When you don’t want unwanted costs, getting rid of your dormant companies can cut down on admin and audit costs and make things clearer for finance professionals. Even though there are some good things about owning a dormant company, there are also some downsides.

For example, the head of a dormant company still has to do management tasks like sending dormant statements and a yearly confirmation letter to Companies House. So, even if your company isn’t doing business, these tasks still need to be done.

Apart from this, there are many more downsides to having a dormant company that you should know about. In this blog, we’ll talk about some of the disadvantages of dormant company, like the legal duties, the costs, and the risks involved.

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Some of the Common Disadvantages of Dormant Company

Here are some of the disadvantages that you may face as the owner of a dormant company:

You have a company but it doesn’t provide any revenue

Imagine having a fully incorporated company and being called a businessman without actually getting any annual turnover or revenue from your company. That’s exactly what happens when you run a dormant a company.

A firm that has become dormant is unable to handle any kind of account payment. In short, it is a company that is unable to trade, has no income of any kind, and is unable to make payments.

You are still paying for the rent, website, and other maintenance factors in exchange for no revenue. You may think no revenue means you don’t have to pay taxes—that’s not completely true!

Annual tax and accounting reviews are necessary

As we told you, a dormant company does not assure you that you won’t have to pay taxes. However, the company is still registered with Companies House, even if it is not operating. Even if your company is not trading or carrying out any transactions, you are to pay a cost for keeping your company logged in government records.

You may not have to deal with this if you strike off your company fully. But, if you want to restart trading after a certain time of dormancy, you need to keep showing all the accounts’ records and pay a minimal tax every year to maintain the status.

Failure to file on time may result in fines for company directors

Just as important as it is to file your yearly account records with the government, it is also crucial to be on time. The lack of transactions typically makes the process of preparing accounts for a dormant company quite simple. In many instances, the data you provide remains largely unchanged from one year to the next.

It’s important to note that failing to file annual accounts on time is a criminal act. The company could be subject to a civil penalty, and as a director, non-adherence could lead to personal legal action and a fine of up to £5,000.

Payment of unimportant compliance charges

As per GOV.UK, dormant companies are not required to pay corporation tax or submit a Company Tax Return unless they are specifically asked to do so. If the company doesn’t file on time, it will have to pay late filing penalties.

These penalties begin at £150 and can go up based on how late the accounts are filed and the nature of the company. If your accounts are filed late for two consecutive years, the penalty will be twice as much. A dormant company has many hidden and apparent costs, such as preparing annual returns and audited financial statements and managing the company.

Keeps many problematic issues hidden

Dormant companies often conceal unresolved matters that could potentially cause future complications. These issues might include:

● Debts between companies within the group
● Potential difficulties related to previously allocated leases
● Issues with pension schemes
● Possible tax complications
● Potential contingent creditors

Addressing these issues will require the involvement of individuals from various departments within your organisation. Consequently, assembling a team from the necessary disciplines, such as company secretarial, accounting, tax, and property, to tackle these unresolved matters can prove challenging. As a result, this task might end up being sidelined.

An additional concern is the potential loss of institutional knowledge regarding these issues due to staff retirements or changes. This could lead to a situation where dormant companies have been on your records for several years, incurring maintenance costs without providing any real advantage.

Staying Dormant is a Huge Blow to Brand Image

If a company is not operating and is not generating any revenue, it is deemed dormant in the UK. Although dormant companies are not required to file or report for any period of time, they can remain on the register for as long as they like.

Apart from the above-mentioned common disadvantages, maintaining a dormant company status is actually damaging your company’s brand reputation overall.

Loss of loyalty & credibility:

When a company exists but does not engage in any business activities, it is not a good sign for anyone to trust it. For the majority of customers, this type of company is probably a fraud. As a result, the longer a company remains dormant, the less credibility it has and the less likely it is to gain loyal customers in the future.

Outdated website & social media profiles:

Because your company is dormant and does not conduct any business, you will be burdened with unnecessary expenses in order to keep it running without generating any revenue. This also means you will forget about your company’s website and social media presence from when you were actively trading. Not to mention, outdated websites and social media profiles always result in a loss of audience after a certain period of time.

Public visibility of dormancy:

Maintaining a dormant company may benefit you in terms of tax savings or other purposes. However, public records reflect the current state of your company, which is detrimental to its long-term reputation. People usually have a hard time trusting any company that has been dormant once.

Difficulty getting business after resolving dormancy:

Now, because your company has lost the trust of your customer base, it will become difficult for you to reach out to people for business after it is reactivated. There is already a lot of competition in the market, and you will lose a lot of clients if you stay dormant for too long.

Loss of partnerships and suppliers:

Just like clients and customers, your partners and some loyal suppliers will also start to lose faith in your business after a Ltd. company set up has been dormant for a certain time. After all, your business is dormant, not theirs. They would likely break contact with your business and start working with other companies instead.

Loss of reputation as a director:

Similarly, if you are the director of your company, keeping it dormant for an extended period of time will reflect on your reputation as a business owner. Keeping the company in a dormant state is almost equal to declaring bankruptcy (from people’s perspective of you as a businessperson). You may decide to close your company after a period of dormancy, but you have to face so many problems if you try to start a UK company again.

FAQs

Q: Why dormant company is formed?
Ans: There can be several reasons why a company might be dormant, such as: holding onto a company name while getting ready to start the business, safeguarding a trading name to stop it from being registered by another business, or reorganising a business that was active before.

Q: Can a dormant company have a bank account?
Ans: Yes, a dormant company can have a bank account. Dormant companies don’t have to open business bank accounts, but they still have to follow the same rules as companies that are more active. When a company becomes dormant, it’s a good idea to close all company bank accounts to stop any possible activity that could make the company not dormant anymore.

In a Nutshell – Disadvantages of Dormant Company

Shutting down a business by willingly removing it from the register at Companies House might be the best option if you’re sure the company will be useless to you in the future. It is certainly not advisable for anyone to keep a company in a dormant state, as it damages the overall reputation.

If you get professional advice and tax help to handle your tax obligation on closure, it could be helpful, especially if you have another project in mind or want to return to work.

If you need help with limited company dormant filing in the UK, BusinAssist can help you.

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