To set up a future company You may have a new trade in mind and want to get everything set up ahead of time. Alternatively, you may need to prepare before trading. Forming a company allows you to be ready to trade quickly while remaining dormant. Because a company can remain dormant for years if certain conditions are met, you could set it up months or even years before you start trading.
Having a dormant company account ready to use was important before, when forming a new company took weeks after mailing paper forms. Thankfully, you can now form a new company online, and Companies House usually approves them within hours. But there may be good reasons to form the company ahead of time.
You may want to register your company name to prevent your competitors from doing so. Our free company name checker will let you know if a name is available. To fully protect the name, you must also form a dormant company and trademark it.
Moreover, a period of dormancy before trading can give the company a valuable sense of continuity and maturity.
To safeguard your interests as a sole trader
You may prefer being a sole trader or self-employed to being a company director. For some people, the arguments for forming a limited company aren't compelling enough, and they can continue as is.
Strangely, many sole traders still set up a dormant company. Because, unless you register a dormant company, anyone can form a limited company with the same name as yours.
Scenario
Imagine the situation. Your business is booming, and you've worked hard to earn a stellar reputation. Then someone legally registers a new company called “Make Your Mark Consultancy Limited.” They aren't very good and develop a bad reputation, leaving unhappy customers in their wake. Some of those customers leave negative reviews online, which potential customers find.
This type of confusing situation could harm your business. You may have to spend a lot of time and money to distinguish your company from another with the same name. If you don't, you may lose out on new business and risk a tarnished reputation.
To avoid this, the sole trader could form a dormant company with the same name as his sole trader business. A dormant company is a simple way to prevent others from profiting from your success or damaging your reputation.
A dormant company is often used to hold a fixed asset such as a property.
The main example is a freehold property or a head lease, with dormant companies being used by flat management companies. A separate Residents' Association Company usually handles management income, expenses, and legal issues, so the flat management company itself should be dormant.
To protect certain assets or intellectual property, an investment holding company may be set up as a dormant company.
Taking a trading break
You may have been trading as a limited company but decide to stop trading for a time. For example, the owner may be on a career break, moving abroad, or events may prevent trading.
If you close your business permanently, you usually wind it up. But what if you plan to trade again or are undecided? Then you have several options:
Maintain the company as a trading entity. The main disadvantage is that full company accounts would need to be submitted to Companies House every year, at a cost. However, if the company trades or otherwise does not meet the strict criteria for a dormant company, it must trade.
Close the company and re-form later. This eliminates the need to pay ongoing accounting and other fees. It is not guaranteed that the name of your former company will be available for use if you decide to trade again.
Keep the company dormant. This simplifies company administration, hopefully lowering costs. It also saves time and money by not having to dissolve the company and start over. The company can go dormant for as long as needed (as long as Companies House requirements are met), and then resume trading when the time comes.
When a company is liquidated
Finally, some businesses may go dormant while being wound up. The company must have met all of the requirements for dormancy for the entire period covered by the best accountant in London.
