What Is a Dormant Company: Definition and Benefits Explained

A dormant company is essentially a business that is not currently active or trading. This means it has no significant accounting transactions during its financial year. Understanding the concept of such companies is crucial for anyone looking to preserve a business name, prepare for future ventures, or minimise operational costs.

Let’s delve deeper into what defines a dormant company and the criteria it must meet.

Definition of a dormant company

A dormant limited company is defined as a business that is not trading or receiving any income. Companies House defines it as one that does not engage in significant accounting transactions. This applies for the entirety of its financial year. This means that if the company is dormant, it does not carry out any business activities and has no other income sources.

For corporation tax purposes, HMRC also defines a dormant company as one that has no significant accounting transactions. Essentially, such a company is inactive and does not incur any expenses or generate any revenue according to the Companies House.

Criteria for dormant status

UK law stipulates that a company must not receive any income or engage in trading activities to be deemed dormant. To maintain this status, a company must avoid any significant accounting transactions during its financial year. This means it should not spend or receive money.

If such a company has even the smallest transaction, it forfeits its dormant trading status. Therefore, maintaining that status requires strict adherence to avoiding financial activities, or it has begun trading. If you want to start trading and the company is dormant, be aware of these regulations.

Difference between dormant and non-trading companies

A dormant company does not conduct any business transactions, while a non-trading company may still have minimal financial activities, was previously trading, or the company stopped trading. Non-trading companies can perform limited financial operations, unlike inactive companies that refrain from all business transactions.

If a company is dormant, it has specific filing obligations despite their lack of trading activities, while non-trading companies may have different regulatory requirements. To remain dormant, a company cannot engage in significant accounting transactions, unlike non-trading limited companies, which can have limited financial operations.

Setting up a dormant company can be a strategic move for various reasons. Common motives for setting up a new company include preserving a limited business name, protecting a brand name, restructuring, or owning assets. Additionally, it allows for a potential sense of continuity and maturity before starting actual trading. Understanding how to make a company dormant is essential to fully benefit from its strategic advantages and remain compliant with legal requirements.

Future business planning

Such companies allow entrepreneurs to lay the groundwork for upcoming business activities without incurring immediate costs, ideal for sole traders. These companies can serve as a strategic reserve for individuals planning future business ventures.

Companies can remain dormant indefinitely if they fulfil specific criteria, making it easier to prepare for future business. Often, inactive companies are used for holding assets or as a means of future business development.

Brand protection

Setting up a dormant or inactive company safeguards your business name and reputation from being used by others. If a private company is dormant, it secures its company name and intellectual property, preventing others from using it until you are ready to trade.

These obligations include submitting dormant accounts, dormant company accounts, and confirmation statements, as well as informing HMRC about its status.

Filing dormant company accounts

Dormant companies are required to submit dormant company accounts, which are simpler than regular accounts. Annually, these companies must file an annual confirmation statement and, if applicable, an unaudited abbreviated balance sheet.

Osome assists clients in preparing and submitting the company's accounting records and other necessary documents for dormant accounts and confirmations. The platform simplifies the process of filing accounts and statements, reducing the administrative burden for business owners.

Confirmation statements

Annual statements are mandatory to ensure the company’s records with Companies House remain accurate. This next confirmation statement is due on the anniversary of incorporation or the last statement’s confirmation date.

If the company is dormant but the registered information changes, it must inform Companies House as soon as possible, ensuring up-to-date information that's compliant with legal requirements.

Corporation tax obligations

A dormant company does not have to pay corporation tax until it begins trading, leading to financial advantages. Companies that are inactive are generally exempt from corporation tax obligations if they remain dormant for corporation tax throughout the entire fiscal year, reducing their corporation tax liability and avoiding any company tax obligations.

The company must inform HMRC about its dormant company status for Corporation Tax. If a company is considered dormant by HMRC in terms of tax returns, it is exempt from filing an annual company tax return.