Winding up a company
All companies have a lifecycle, some much longer than others. At some point you may be faced with winding up a company that no longer serves its purpose. You no longer require the company to be registered and you would like to close the company once and for all.
We are concerned that some advisors tell clients to do nothing. Simply cease filing annual returns with the Companies Office and let the company fall off the register. Whilst this seems simple, this isn’t the end of the story. Failing to file an annual return is an offence under the Companies Act 1993. The Companies Office could chose to prosecute and each director of the company could be fined up to $10,000. In addition, the Inland Revenue Department can apply to reinstate a company if the tax affairs of the company are not in order. So you are not really getting any peace of mind by following this route. It’s a bit like hitting the snooze button on your alarm clock – eventually the alarm will come back on.
Winding up a company takes a little time and there’s a process to follow to ensure that there is no come back on you as a director. Best practice dictates that you should formally go through a process to wind the company up. This is called a voluntary removal. We have included a helpful checklist below.
- Resolution of shareholders – You need to have a special resolution of the shareholders which should be in writing and signed. It should state that at least 75% of the shareholders agree to close down the company. It’s also best practice to state how you will organise the distribution of any assets that the company owns.
- Deregister for GST & FBT (if applicable) with Inland Revenue. If you are an employer, you’ll need to file your last employer monthly schedule before you can de-register as an employer. Please note that you will need to dispose of any assets in the business and this needs to be done before you deregister from GST.
- Employees – remember to include a finish date for any employees your payroll system so that IRD is informed electronically.
- File the final income tax return at the end of the tax year with depreciation adjustments for the sale of any assets. Some directors attempt to coincide the closure of a company with balance date but in reality this can be tricky. You may receive income or pay bills after 31 March so it pays to view winding up a company as a gradual process.
- Apply to Inland Revenue – Write to the Commissioner of Inland Revenue asking if the department has any objections to winding up the company and seek her approval. Your accountant or solicitor can do this for you. Once approval is received, the last step is to remove the company formally from the Companies’ register. IRD will assess any distributions made to shareholders for income tax so it’s really important to seek advice about how to get residual cash out of the business without causing an income tax issue. There are some quite specific tax rules around capital gains and care must be taken not to fall foul of IRD rules. Additionally, if your shareholder’s current account is overdrawn (in other words, you owe the company money), you’ll need to declare that in your own individual tax return as a dividend. If you have sold the assets and customers of the company, it’s important that you check with your accountant to make sure you don’t pay tax on the proceeds of the sale.
- Removal from the Companies’ Register – Firstly, you should ensure that your annual returns with the Companies Office are up to date. Once this is done you can make an application to the Companies Office to wind up the company stating the grounds for the request. This process is free of any fees. The application must state that the company has ceased trading, it has discharged all its liabilities to its known creditors and distributed any surplus assets. You’ll need to upload the shareholder resolution mentioned above. This can be done by your accountant or lawyer on your behalf. Bear in mind that the Companies Office will then advertise the removal of the company to give your creditors an opportunity to object to the removal. These advertisements are in the New Zealand Gazette under “Cessation of Business, along with the Companies Office website itself.
Remember to keep your business records securely for at least seven years. The IRD can still chose to audit prior years even if the company is closed.
Some clients opt to keep the company dormant for future use – and that’s perfectly fine. Rather than file nil returns with IRD every year, you can complete an IR433 form to put the company into hibernation with IRD. You’ll still need to file annual returns with the Companies Office.
This article covers solvent companies without significant assets, not companies being put into liquidation. Sometimes it is beneficial to liquidate a company – particularly if you have sold the assets of the company and withdrawn the funds. This can have tax consequences so be sure to contact us if this applies. If you would like us to help you with any or all of the steps above, just pick up the phone for a confidential chat. Remember, this advice is general in application and your circumstances may be unique, so always seek professional advice.