Why have a dormant company?

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The vast majority of companies actively trade, but there are also over 300,000 dormant companies registered with Companies House. Dormant companies benefit from reduced administrative requirements: in particular, they don’t have to provide the same level of detail in their accounts. While that’s hardly a reason in itself, there are a number of good reasons why a dormant company may be formed or maintained.

In this article we’ll look at the 5 main reasons why you might choose to have a dormant company:

1 To set up a company you intend to use in the future

You might have a new trade in mind and want to get everything set up in advance. Alternatively, you could have preparation to do before you can actually start trading. By forming a company, you can be ready to trade at short notice, and in the meantime it can remain dormant. As a company can remain dormant indefinitely so long as it meets certain requirements, you could set the company up a few months or even years before starting to trade.

Having a dormant company ready to use in this way was more important in the past, when forming a new company could take several weeks after sending paper forms in the post. Thankfully, forming a new company can now be done online and Companies House will usually approve new companies in a matter of hours. However, there might still be good reason to form the company in advance.

In particular, you might want to ensure the company name is registered to prevent your competitors from doing so. We’ve looked elsewhere at the value of a good company name so, if you have a valuable name in mind, it can be worth registering the company in advance and thereby reserving the name – our free company name checker will let you see if a name is available. Be aware, however, that as well as forming a dormant company you would need also to trade mark the name for full protection.

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Furthermore, if the company remains dormant for a period of time before starting to trade, the business may also gain a valuable sense of continuity and maturity.

2 To protect your interests and reputation as a sole trader

You might prefer operating as a sole trader, self-employed rather than a director of a company. For some people, the reasons to consider setting up your business as a limited company won’t be persuasive enough and they can get along just fine as they are.

However, strange as it may seem, a lot of sole traders still set up a dormant company. That’s because, unless you register a dormant company, there is nothing stopping someone else forming a limited company with the same name as your business.

Example scenario

You can just imagine the situation. You’ve been self-employed, trading for several years as “Make Your Mark Consultancy”. Business is good and you’ve spent a lot of time and energy building up an excellent reputation. Then someone registers a new company called “Make Your Mark Consultancy Limited”, which would be legal for them to do. They aren’t particularly good and develop a poor reputation, leaving a trail of dissatisfied customers in their wake. Some of those customers leave bad reviews online, which your potential clients discover when trying to find you.

This type of confusing scenario could cause your business all sorts of damage. You might end up having to spend a lot of time and money distinguishing your business from the company with the same name. Otherwise, you could easily miss out on new work and face an unfairly damaged reputation if people associate the bad stories with your business.

If, instead, the sole trader chose to form a dormant company with the same name as his sole trader business, he could rest assured that no one else can form a company of that name. As a dormant company is comparatively straightforward to form and maintain, it’s an easy way to prevent anyone else taking advantage of your success or damaging your reputation.

3 To hold a fixed asset such as a property

The main example is a freehold property or the head lease to a property

Dormant companies are often used to hold a particular types of asset.

The main example is a freehold property or the head lease to a property, with the dormant company option used by companies who deal with flat management. For such flat management companies, a separate Residents’ Association Company will usually handle management income, expenses and legal issues, meaning that the flat management company itself should meet the conditions required of a dormant company.

An investment holding company may be set up as a dormant company on the same basis and for much the same reason, to protect certain assets or intellectual property.

4 Taking a break from trading

Sometimes you might have been actively operating as a limited company but decide to completely cease trading for a period of time. For example, the owner may be taking a career break, be moving abroad temporarily or events may just get in the way of trading.

If you’re stopping trading permanently, you’ll generally wind up the company. But what if you intend to trade again in the future or are undecided about whether to resume trading? In that case, you have a number of options:

  • Continue to maintain the company as an active trading entity. The main disadvantage here is the fact that full company accounts would need to be submitted to Companies House each year, with the associated cost of producing them. However, if the company trades at all or for other reasons doesn’t meet the strict criteria required of a dormant company, the company will have no other choice but to do so.
  • Close the company and form another if required later. This provides a clean break and means there’ll be no need to pay continuing accounting and other fees. However, if you later decide to trade again you’d have to form a new company, with no guarantee that the name of your former company will be available.
  • Maintain the company as a dormant company. This simplifies the administration of the company, hopefully meaning that costs are reduced. It also saves the cost and effort of closing down the company, only to form another in the future. The company can remain dormant as long as required (so long as Companies House requirements are met) and it’s then straightforward to resume trading with the company when the time comes.

5 When a company is being wound up

Lastly, some companies may be dormant for a period while being wound up. Remember that to be eligible to submit dormant company accounts, the company must have met all the requirements for dormant status for the whole period covered by the accounts.

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