How to retire if you are a company owner

When company owners plan for their retirement, there are a number of important decisions to make regarding the future of their business, as well as their own financial affairs to consider. We will take a look at some of the options facing company owners as they look to take a step back and ease into a more leisurely pace of life.

Selling the business

Perhaps the most obvious option for a business owner who wishes to enter retirement is to put their company up for sale. Subject to the terms of any shareholders’ agreement, they can sell all their shares in the company and thereby cede ownership to a third party.

An alternative to selling up completely, whilst still stepping back from the day-to-day operations of the business and easing into retirement, will be to sell a majority stake in the company. This will effectively hand over control of the business to the buyer, who will often become the new managing director.

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Sometimes this will be combined with resigning as a company director, thereby leaving the former owner as a mere shareholder. Although they can also decide to carry on as a ‘sleeping’ director whilst handing over the reins.

Another option is to draft in a new managing director to run the business, which may also involve giving them a stake in the company. However, if the original company owner retains more than 50% of the shares, they will still essentially be in control of the company (even if they are just agreeing to all the decisions made by the new director).

Phasing out control

In a family business, parents will often hand over the executive reins to their children, through a gradual process that may take several years.

In this scenario, the transfer of shares may be less important, as overall control of the business and funds stay within the family. But the children – or one chosen child or relative – will take over running day-to-day affairs. Possibly with their parent or parents acting as advisers and mentors.

Can my own company make contributions towards my pension?

In non-family businesses, control may also be phased out, possibly by handing more executive control to another company director who is also a joint owner. This will normally also entail selling shares to the relevant business partner.

In either of these scenarios involving phased out control, there will generally be a longer time frame for the overall retirement process. The retiring owner will often be actively involved in training up their replacement, to ensure they are fully equipped to run the business effectively.

Voluntary liquidation

In a situation where a sale of the business is not a viable option, and there are no family or business associates available to take over the business, it may be necessary to consider voluntary liquidation.

Members’ Voluntary Liquidation (MVL) is the form of liquidation often used to close a company where a business owner is retiring with nobody in line to take over the business.

Although MVL is an expensive option because a liquidator needs to be appointed, it can be a more tax-efficient approach. This is because any proceeds extracted from the company will be treated as capital distributions as opposed to income distributions. This essentially means that taking money out of a company via MVL is subject to less tax than extracting money via dividends.

What’s the process for a MVL?

A Declaration of Solvency will have to be signed by a majority of directors. In general terms, this allows the company directors to make a statutory declaration that states that the company will be able to repay its debts, along with any interest, within a fixed period of time not exceeding 12 months.

An Extraordinary General Meeting has to be called within five weeks of the declaration. A Special Resolution will be passed, agreeing to the liquidation and the appointment of a liquidator. Within 14 days of their appointment, the liquidator must give notice of their appointment to Companies House, the UK Registrar of Companies, and advertise the appointment in The Gazette.

The liquidator then takes control of the company and carries out their duties, such as gathering and distributing assets accordingly.

Are there any alternatives to MVL?

If a company is solvent and there are no threats of liquidation, an alternative way to shut it down is to apply to have it struck off the register of companies. However, one of the requirements of this process is that the company cannot have traded in the three months preceding the date of application to get struck off the register.

If the company is insolvent, it may be possible to start a Creditors’ Voluntary Liquidation (CVL).

What happens when a company shareholder dies?

This will also lead to the company being struck off the register of companies. Any remaining liabilities due to insufficient assets will be written off unless personally guaranteed. But if a company director is found to have failed in their fiduciary duties and this caused the CVL, they could be guilty of fraudulent trading or misfeasance, in which case they face personal liability for part, or all, of the company’s debts.

Should I make my company dormant?

There is no need to have a company struck off the register of companies to cease trading. But all the usual administrative filings will need to carry on being filed unless the company is made dormant. A company will be considered to be dormant if it has had no ‘significant accounting transactions’ during the relevant accounting period.

A company that’s both ‘small’ and ‘dormant’ has a significantly reduced statutory burden. It only has to submit an unaudited, abridged balance sheet and certain notes to Companies House, plus file an annual confirmation statement (formerly known as an annual return). It won’t have to file a profit and loss account or directors’ report.

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A dormant company also has no corporation tax to pay, but HMRC should be notified within three months that a company has become dormant.

A company owner can therefore decide to simply make their company dormant, instead of going into MVL or having their company struck off. This process is more straightforward and cheaper than MVL. It also provides the option of opening up the business again very quickly if it is necessary to come out of retirement.

The downside is that there will still be ongoing administrative responsibilities whilst the company is dormant, even though they are reduced.

Pensions

Upon their retirement, unless a company owner has built up very substantial savings and/or sold their business for a significant sum, it is likely they will come to rely on their pension to maintain their lifestyle, in the absence of income from their business.

It is therefore important that, prior to giving up their company or shutting it down, they ensure that their pension payments will suffice as a substitute for their previous level of earnings.

Private and occupational pension schemes can normally be taken from the age of 55. The State Pension can be claimed from 65. In general, the earlier these are taken, the lower the payments.

It can sometimes make sense to delay retirement for a few years to increase the monthly pension payments to a more level suitable level. This is especially the case for business owners who have an outstanding mortgage or other major financial liabilities.

Can I own a business in my retirement?

There is nothing preventing someone from going into retirement whilst still continuing to own a company (or several companies) which is a going concern.

A company owner can decide to draw their pension, hire a managing director to steer the business, and take a step back from day-to-day operations.

Many people decide to go into semi-retirement rather than completely turn their back on business. In fact, the very concept of retirement is generally less popular amongst entrepreneurs compared to most employees. The idea of giving up the business they created is anathema for many.

Should I close my limited company or make it dormant?

Business owners will often carry on working in some form beyond ‘retirement.’ For example, as a consultant to their own company.

However, if a retired company owner is reliant on dividends or other payments from their business, if the organisation gets into financial difficulties this can threaten their personal well-being. Consequently, they may need to come back out of retirement to rescue their ailing business.

Furthermore, there will normally be ongoing costs of hiring managers to do the work that was previously undertaken by the owner. This can result in reduced dividend payments.

Can I be forced to retire from my own business?

If a business owner owns less than 50% of the company shares, in theory, they can be forced to resign as a director, subject to the articles of association.

This should not be done on the basis of age as this will be considered age discrimination – and the government has abolished the default retirement age (previously 65).

However, if a director is found to lack mental capacity (e.g. they are suffering from advanced dementia) by a medical professional, this can potentially lead to their directorship being automatically terminated.

This situation often arises in family-run businesses and sometimes leads to litigation. However, this is a very tricky area and a lawyer should always be consulted for further advice.