Out of Business - Dormant Company versus Company Deregistration
Starting a business is an exciting venture, but sometimes circumstances change, and a company may no longer be required to operate.
In such cases, as a business owner, you will have to decide whether to keep the company dormant or deregister it.
Dormant and deregistered companies are two legal terms that are often used interchangeably but refer to different situations.
In this article, we will explore the differences between a dormant company and a deregistered company and the pros and cons of each option.
By the end of this article, you will understand which option is best for your business.
Ready to go?
What is a dormant company in Australia?
In Australia, a dormant company is registered with the Australian Securities and Investments Commission (ASIC) but ceased trading and does not take part in business activity or earn any income during a period.
A company’s inactive statement is dormant if it has not:
- Carried on any business during the financial year;
- Earned any income during the financial year;
- Issued any shares during the financial year;
- Made any payments to directors or related parties during the financial year.
What is a deregistered company in Australia?
A deregistered company in Australia is a company that is no longer on the Australian Securities and Investments Commission (ASIC) register of companies.
A deregistered company no longer exists as a legal entity and cannot trade or enter into contracts.
A company may be deregistered for several reasons, including:
- Voluntary deregistration – When a company decides to cease trading and remove itself from the ASIC register, it can apply for voluntary deregistration.
- Failure to pay annual fees – If a company fails to pay its annual fees to ASIC, it may be deregistered.
- Failure to lodge annual company accounts and tax returns – If a company fails to lodge its annual returns with ASIC, it may be deregistered.
- Insolvency – If a company becomes insolvent and cannot pay its debts, it may be deregistered.
- Regulatory action – ASIC may deregister a company if it believes the company has breached its obligations under the Corporations Act 2001.
What is the difference between a dormant and an unregistered company?
Let’s delve deeper into other differences between a dormant and an unregistered company.
In Australia, a dormant company is a company that is registered with ASIC but has not been carrying on any business activity or earning any income during a period.
On the other hand, an unregistered company is a company that has not completed the process of registration with ASIC and is not a legal entity.
Its legal status
A dormant company is a registered legal entity, while an unregistered company is not a legal entity until it has completed the registration process with ASIC.
The compliance requirements
A dormant company must meet certain legal obligations, such as filing annual accounts of financial statements and tax returns with ASIC, maintaining accurate records and registers, and paying the annual review fee, even if it does not carry on any business activity. An unregistered company has no legal obligations until it completes the registration process with ASIC.
Dormant companies can still be liable for their debts and legal obligations even if it is not carrying on any business activity.
An unregistered company cannot enter into contracts or incur debts until it completes the registration process with ASIC.
A dormant company name is protected, no other company or business can use it. An unregistered company name is not protected, any company or business can use it .
What are the considerations when deciding to deregister a company or keep it dormant?
Now that you understand better, let’s explore the factors you should consider when deregistering your existing company or keeping it dormant. Keep in mind, it is dependent on the specific circumstances of the company and the goals of you and your directors.
Consider these factors –
Its future use
If there is a chance that you will use your company in the future, it may save time and money to become dormant, compared to re-registering a new company or changing a company name in the future.
The compliance requirements
A company may require ongoing dormant company accounts such as annual accounts, filing annual company tax returns online, and paying ASIC fees. If you do not meet these requirements, ASIC may deregister your company, which can be costly and time-consuming.
Keeping dormant companies may be more cost-effective than deregistering and re-registering in the future. However, this depends on the ongoing compliance requirements and other costs associated with a dormant status.
The director is personally responsible for all liabilities of a deregistered company. Keeping a company’s dormant status may provide some protection from personal liability.
The company reputation
If your company is deregistered, it may harm its reputation. Keeping the dormant company active may preserve its reputation, especially if it has a history of successful operations.
Your dormant company may still have taxation obligations, such as lodging an annual company tax return or dormant accounts, even if it is not trading. Deregistering the company can eliminate any ongoing tax obligations.
Any legal proceedings
If your company is involved in legal proceedings, it may be difficult to deregister it until the legal proceedings are completed. Keeping the company dormant may be a better option in this case.
Now that you are clearer about which way to go with your company, let’s look at your obligations.
What are the obligations of a dormant company?
Dormant companies are still required to meet certain legal obligations, such as filing annual financial statements and company tax returns with the ASIC, maintaining accurate records and registers, and paying the annual review fee. However, it is not required to pay any income tax or lodge a Business Activity Statement (BAS) as long as it remains dormant.
If your dormant company begins to carry on business or earn income, it will no longer be considered dormant and will need to start meeting its legal obligations accordingly.
What is involved in keeping a company dormant?
Keeping a company dormant in Australia involves steps to ensure that the company does not carry on any business activity or earn any income.
Here are the steps involved in keeping a company dormant –
1. Cease all business activity
The first step in keeping your company dormant is to cease conducting previously active business or activities. This means the company must not carry on any trading activity or business, sell goods or services, issue invoices or receipts, or enter into contracts or agreements.
2. Inform all stakeholders
Your company must inform its shareholders, directors, and employees that it is dormant and not carry on any business activity.
3. Maintain records
Your company must maintain accurate records and registers, including a register of members, director’s details, and financial records. This ensures the company is still compliant with the Corporations Act 2001.
4. Submit Annual Review
Your company must submit an annual review to ASIC, including a special purpose financial statement (SPFS) that declares the company dormant. The SPFS must include a declaration from the company director or secretary confirming that the company did not carry on any business activity or earn any income during the financial year.
5. Pay the Annual Review Fee
Your company must pay the annual review fee to ASIC, which is a fixed fee payable by all companies registered in Australia. The fee maintains the company’s registration with ASIC.
6. Monitor the company’s status
Monitor your company regularly to ensure that it remains dormant.
If the company begins to carry on any business activity or earn any income at any time, it is no longer dormant and will need to start meeting its legal obligations accordingly.
Deregistering a Company
How do you deregister a company in Australia?
Make it easy for yourself, let Sleek do it!
Deregistering your company in Australia is a formal process following legal and regulatory requirements.
Here is a general overview of the steps involved in deregistering a company:
1. Pass a resolution to deregister
Your company can only be deregistered if the members pass a special resolution of at least 75% votes in favour of.
2. Notify ASIC
Your company must notify the Australian Securities and Investments Commission (ASIC) of its intention to deregister, using the ASIC deregistration application form.
3. Prepare final financial statements and tax returns
Before deregistering your company, it must prepare final financial statements and a company tax return up to the date of deregistration, following Australian accounting standards and relevant corporation tax laws.
4. Settle outstanding liabilities
Your company must settle all outstanding liabilities, including debts, taxes, and other obligations, before deregistering. If the company cannot pay its debts, it may need to be liquidated instead of deregistered.
5. Notify creditors and employees
Your company must notify its creditors and employees of its intention to deregister. This involves sending letters or emails to all known creditors and employees and publishing a notice in a national newspaper.
6. Cancel licenses and permits
Your company must cancel any licenses or permits held before deregistering. This may include cancelling business licenses, trade permits, and other regulatory approvals.
7. Wait for ASIC to process the application
Submit the ASIC deregistration application and wait for ASIC to process the application. ASIC will usually take around 2-3 months to process the application.
8. Confirm deregistration
Once ASIC has processed your application, it will notify the company that it has been deregistered. The company will no longer exist as a legal entity and its name removed from the ASIC register of companies.
Don’t fret. Sleek is here to help you decide whether a dormant company or a deregistered company is the way to go under your circumstances. Call us today on +61 2 9100 0480 or schedule a meeting with a Sleek accountant here.
Yes, dormant companies in Australia can trade again if the company decides to resume its business activities. However, before the company can start trading again, it will need to complete certain legal and regulatory requirements.
When ASIC deregisters a company, it is removed from the ASIC register and no longer exists as a legal entity. The company cannot trade or enter into contracts, and any remaining assets will be transferred to the Commonwealth.
When a company is deregistered, the directors may still be held personally liable for any outstanding debts or legal actions. They may also be required to settle any outstanding tax obligations or pay any unpaid employee entitlements.
This article is meant to provide general information. Tax regulations can be complex and subject to change, so it’s always best to consult a qualified tax professional or the Australian Tax Office (ATO) for specific advice tailored to your situation.