What Is a Dormant Company: Know Everything About It   

A dormant company has been registered with Companies House but does not now carry on any business or generate any revenue. A Limited Company, a Private Limited Company, or a One-Person Company can register as a dormant company and be free from certain legal requirements. Companies registered to own an asset or intellectual property but have no substantial accounting activities are considered dormant. This post will cover everything you need to know about dormant companies and their benefits. 

Dormant companies are sometimes misinterpreted for being closed or outdated, although this is not the case. A firm may opt to go into dormancy for various reasons, including reserving a company name before publicly trading, reorganizing a formerly active corporation, or preserving intellectual property and trading rights from other enterprises. Whatever the cause, it is critical that every business understands what a dormancy period includes and what procedures must be followed to keep it. 

What Is A Dormant Company? 

Any corporation or group that is not engaged in business or commerce and does not have any other sources of revenue is considered inactive.  In that case, if a corporation is not trading, it is said to be dormant, often called ‘inactive.’ Of course, a business may only be considered inactive if it has been adequately registered with Companies House and HMRC has been notified. 

Conditions for Applying For Dormancy 

Meet the following requirements before you apply dormant company account easily

  • No inspection, inquiry, or investigation has been ordered, taken up, or carried out against the firm;  
  • The company does not have any overdue public deposits, nor is it in default in paying them or interest on them;  
  • There has been no legal order or action against the company and no default in the firm’s payment of workmen’s dues. 
  • The company has no outstanding statutory taxes, dues, duties, or other obligations payable to the Central Government, any State Government, or local authorities;  
  • You have not applied with the intent to deceive creditors or defraud anyone else; 
  • The business’s securities are not listed on any stock market in India or abroad;  
  • The firm has no existing loans, including secured and unsecured; however, if the company has an outstanding unsecured debt, it may apply for dormancy only after receiving a letter of consent from the lender. Include this NOC in the Form and file with the ROC. 
  • There is no dispute over the company’s management or ownership; a certificate from management is necessary for this respect. Attach this Certificate to the Form and file with the ROC.

Benefits of Dormant Company 

Now that you understand what a dormant company is, the first thing that comes to mind is why somebody would start a company and register it to declare it defunct? The fundamental goal of achieving or maintaining an excellent position for a company is to keep its corporate status even if it does not do business. 

If someone wishes to take a break from their business to relaunch it later, they must apply for dormant status. Although a Dormant Company is neither active nor functioning, it is nevertheless considered a legal entity. The following are the main advantages of Dormant Company: 

  • Protects and safeguards the company’s name; useful for getting started on future ventures. 
  • Assists in the preservation of a fixed asset or intellectual property. 
  • There is less compliance than when the company is closed or struck off. 
  • It’s simple to react and obtain active status. 
  • Until a Dormant Company becomes reactive, it is not responsible for paying any taxes. 
  • There is no need to re-invest at the expense of incorporation. 

What Constitutes Permitted Trading for a Dormant Company? 

An inactive corporation may carry out the following transactions that are not regarded as “major accounting transactions”: 

  • Subscriptions are paid in shares (the first shareholders who join the company at the time of incorporation). 
  • Admin expenses for processing an annual confirmation statement, altering a business name, or re-registration paid to Companies House. 
  • Payments to Companies House as a penalty. 

 Do Dormant Companies Have to Pay Tax? 

A defunct corporation is not obligated to pay tax if it is inactive for the whole fiscal year. As a result, you won’t have to prepare any accounts or tax returns for that period. However, if your business starts or stops trading within a financial year, all money earned will be subject to tax throughout the active period. 

Difference between Dormant and Non-Trading Companies 

Dormant firms are, by definition, non-trading entities. Non-trading corporations, on the other hand, are not always dormant. Even if a company does not do business, it may be involved in major transactions (like pre-trading expenditure). If this is the case, they will not be classified as inactive, even if they are not trading at all. 

Changing a Dormant Company Status 

You must notify HMRC of your status change from “dormant” to “active” within three months of trading if you wish to resume trading under your dormant company name. Sign in to the online HMRC account and change your company’s status to “active for Corporation Tax.” A registration for Corporation Tax is necessary for a firm that has been registered as dormant since its inception, and you’ll need a corporate UTR number to do this. 

The Bottom Line 

The main advantage of a dormant corporation is the protection of its name. You risk losing your company name if you don’t create a limited corporation. Someone else might register a corporation using your preferred business name. Remember that your firm can be designated as inactive for the duration of its existence to safeguard your brand. 

 

Stacey Nabutse
Author: Stacey Nabutse

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