Considerations in closing a Company
It's been 6 years of operating a retail company - Collaboration Tea, with my good friend and co-founder, Abigail Lam, and recently we decided to close the Company. Not because it was no longer making profits, but because operationally we are unable to scale the business and hire people to run the business on its own. Mainly, there would be alot of financial investment required which the revenue may not justify. Operationally, we were very involved in the company (hands on), and it has been hard work running it on the side.
A few questions came to mind when considering to close the company:
Should we retain the legal entity for future businesses?
How do we close the company?
Retaining the legal entity
Collaboration Tea (retail brand) is the working name of Collab Pte Ltd (registered legal entity), hence closing "Collaboration Tea" may not require the winding up of the legal entity "Collab Pte Ltd". The reason why we left of the word "tea" from the legal name was the intention to keep the name if we needed to change the direction of our partnership.
Pros
- Do not need to pay start up incorporation costs for a new business in the future
- Retain the legacy of the partnership (and the year it was incorporated)
- Legacy and social media following
- Have existing structures in place
Cons
- Maintaining the legal entity requires running costs, minimally annual filing and corporate secretarial fees, annual signing of corporate resolutions, accounting system fees, maintaining of financial records, filing of corporate taxes and banking fees (if bank account is retained). These are minimally $100 for fees alone and can add up to about $1,000 a year for services to maintain a legal entity.
- New companies are given tax exemptions for the first 3 financial years. From YA2020 onwards, 75% for the first $100,000 chargeable income ("CI") and 50% on the next $100,000 CI. If the new business has $200,000 of CI, it has to regularly pay $34,000 (17% tax rate). For the first 3 years, a new company only pays $12,750 on the first $200,000 CI which is (6.375% tax rate).
As you may be able to notice, retaining the company has many valuable but intangible pros, and the cons are mainly financial. It costs money to retain even a dormant company.
If you choose to retain the company, think about how you may want to withdraw the remaining monies in the bank account.
1. Declare dividends
Generally, company constitutions only permits directors to declare dividends up to the amount of profits earned in a particular year. If the company is slowing down and the profits for the year is not high, this may not be a viable option.
2. Directors' loan
If your company is small and you are fairly sure that the loan is purely to withdraw the remaining monies in the company, this can interest-free loan can be done equally for each director or the sole director. This, however, must still see the company fit to pay its current and subsequent debts, as "a director must make decisions objectively, act in the best interest of the company, and be honest and diligent in carrying out his duties".
3. Share buy-back
The company can buy-back the shares that has been previously issued. If each director holds 100 shares, the company can buy-back up to 99 shares and payout a sum in order to retain the 1 share that each director holds in the company.
How do we close the company?
To read more on how to close a company, go to our post on How to close a Company.
