Selling your business and ceasing trading is a significant milestone, but what happens to the company itself? While some business owners leave the company dormant, others take proactive steps to formally close it. The best approach depends on several factors, including tax efficiency, legal certainty, and cost considerations. This article explores the options available, the benefits of a solvent liquidation, and how to manage post-sale company affairs effectively.

What Are Your Options?

Once you have sold your business and ceased trading, you generally have two primary options for dealing with the company:

1. Short-form removal from the Companies Register

2. Formal solvent liquidation

The choice depends on factors such as outstanding liabilities, retained earnings, tax implications, and the level of certainty you require.

When to Consider a Formal Solvent Liquidation

A solvent liquidation, is a formal process under the Companies Act 1993 where a liquidator is appointed to wind up the affairs of a solvent company. This process provides certainty that all liabilities, including tax obligations, are properly dealt with before the company is removed from the Companies Register.

A solvent liquidation is advisable when:

• The company has significant retained earnings or assets to distribute to shareholders.

• There are potential contingent liabilities (e.g., tax risks, guarantees, or warranties provided as part of the business sale).

• You want legal certainty and finality, reducing the risk of future claims.

• You need to distribute capital in a tax-efficient manner.

When is a Short-Form Removal Suitable?

A short-form removal is a simpler, lower-cost option where a company applies for removal from the Companies Register under section 318 of the Companies Act 1993. This approach is suitable when:

• The company has no outstanding debts or liabilities.

• Retained earnings and assets have been fully distributed before applying for removal.

• There are no anticipated future claims against the company.

However, a short-form removal does not provide the same legal certainty as a formal liquidation. If a claim arises after deregistration, the company can be restored to the register, potentially causing issues for former directors and shareholders.

Why Does a Solvent Liquidation Provide More Certainty?

A solvent liquidation ensures:

• All liabilities, including tax obligations, are settled before the company is removed.

• Proper distribution of assets is conducted under the supervision of a licensed insolvency practitioner.

• Future risks of restoration or unexpected claims are minimized.

• Tax-efficient distributions are managed correctly, reducing the risk of disputes with Inland Revenue.

Reducing the Costs of a Formal Liquidation

Business owners can take steps to minimize liquidation costs by:

• Settling all outstanding liabilities and closing accounts before appointing a liquidator.

• Distributing non-cash assets before liquidation (where tax-efficient to do so).

• Providing clear financial records and ensuring tax filings are up to date.

• Minimizing the number of shareholders, as distributions to multiple shareholders increase administrative work.

Tax Issues in Liquidation

A key consideration in liquidation is the tax treatment of distributions to shareholders.

• Retained Earnings: If the company has accumulated profits, these are generally distributed as a taxable dividend, subject to Dividend Withholding Tax (DWT). Usually an imputation credit balance is available to offset much of the tax liability.

• Capital Distributions: Distributions of capital (e.g., proceeds from selling assets or paid-in share capital) are generally tax-free, provided they are correctly structured.

• Final Tax Returns: The company must file final tax returns with Inland Revenue, including a final GST return (if applicable) and confirmation of the liquidation process.

How Does the Liquidator Distribute Retained Earnings?

The liquidator is responsible for distributing retained earnings and capital however often the company’s accountant can do much of this to save costs. This is as follows:

1. Settling all outstanding creditors – Ensuring all debts, including tax obligations, are cleared.

2. Paying retained earnings to shareholders – Retained earnings are usually distributed as taxable dividends, subject to DWT.

3. Distributing capital to shareholders – Share capital and capital reserves are distributed by the liquidator tax-free on liquidation.

4. Final removal of the company – Once all matters are settled, the liquidator files for the company’s removal from the Companies Register.

Key Takeaways

• A formal solvent liquidation provides legal certainty and tax-efficient distributions, especially when retained earnings are involved.

• A short-form removal is suitable for simple cases but carries the risk of company restoration if claims arise.

• Understanding the tax treatment of final distributions is crucial for shareholders to avoid unexpected liabilities.

• Business owners can reduce liquidation costs by ensuring all financial affairs are in order before liquidation begins.

If you have sold your business and are unsure about the best approach for closing your company, we can provide expert guidance. Contact us today for a consultation on your post-sale company obligations and tax-efficient strategies for finalizing the business.