Difference Between Dormant Companies and Active Companies?

There are times when companies have few or no ongoing transactions or activities. Several airlines have postponed taking action until they believe the timing is right. We refer to them as dormant companies because, unlike active companies, they don’t actively conduct business. Entrepreneurs, investors, accountants and regulatory authorities need to distinguish between dormant and active companies. In this post, we’ll explore the main difference between dormant companies and active companies, find out why some businesses are dormant, look at any legal and financial impacts, and see how regulators and tax officials classify them.

What is a Dormant Company?

The difference between dormant companies and active companies is clear if we start considering the definition of both companies. A company is dormant if it has registered with a regulator like Companies House or the Secretary of State but has not done any important accounting work during a given year. At present, it is a registered company under the law but is not involved in any business operations. Companies House, which oversees UK businesses, defines a dormant company as one that does not carry out major accounting activities in a financial year. A few dormant company characteristics are:

There should be no income or sales happening with the company.
There are no extra costs, except statutory fees required for filing.
No trading or business activities are taking place.
You are required to file important documents such as annual returns or confirmation statements.
The individual may still possess property or intellectual property.

What is an Active Company?

By comparison, an active company carries out its usual business activities. These examples are:

Businesses buy and sell goods or services.
Employing staff
Making payments of wages and taxes
Dealing with bank accounts
Putting your money into investments
Taking care of rent or utility bills

An active company stays busy and works, and its legal and financial duties are much more involved than those of a company that is not active.

Difference Between Dormant Companies and Active Companies in Legal Responsibilities

The difference in the legal responsibilities of both companies shows the difference between dormant companies and active companies. Both dormant and active companies have to follow statutory requirements. The tasks here are influenced by the way the company operates.

Dormant Company Obligations

Companies not making any sales or carrying on business activities must comply with regulatory requirements and file the necessary documents. This includes:

Annual Reporting is Required as a Confirmation Statement.

Annually, dormant corporations are required to send an annual confirmation statement (formerly known as a UK annual return). It is used to prove the official address, those responsible, those who own the company and how much capital the company has. The objective is to keep public records up to date, irrespective of trading activity.

Passing The Dormant Accounts

UK companies are required by Companies House to submit a yearly report. Such simplified accounts reveal that the defunct firms engaged in a few major financial activities in the given period. A standard part of self-employment is a declaration of dormancy.

Advising Tax Authorities When A Fund is Dormant

Both the UK’s HMRC and the U.S.’s IRS require notice that the firm is not operating. Tax authorities might surprisingly reach out or punish you for not turning in your tax returns on time. If a business starts to look inactive, it may not be required by HMRC to send corporation tax returns to the UK.

Few or No Taxes

There is generally no tax for dormant firms because they don’t earn an income. There is no significant financial outlay for registering or keeping up a company’s registered office, even if the company is dormant.

Active Company Obligations

A trade or commercial corporation that is active must respect more banking, legal, and regulatory duties. With such rules, the corporation acts with integrity and fulfils all its business tasks.

Full Submission Of Financial Statements To The Annual Review

Large and smaller active organisations usually create full annual financial statements, with the possible items being a profit and loss account, balance sheet, cash flow statement, director’s report and auditor’s report. These accounts must be sent by the company to its jurisdiction’s Companies House or its equivalent.

Submitting Your Tax Returns And Paying What’s Owed

Operating companies in every country must give an annual tax report to the authorities, including HMRC in the UK and the IRS in the US. These documents list their taxable earnings, how much they’re allowed to spend and how much they’ve given the government in taxes. Filing inaccurate information can cause you to be fined, and interest might be added. For active businesses, the tax on earnings from the previous year is due nine months from the end of those accounting periods.

Getting Registered For VAT And Following The Rules

Any firm operating in the UK will need to register for VAT if its yearly income goes past £90,000 in 2025. The corporation must do the following as a registered company:

Apply a VAT tax on products and services sold in your business
Files for VAT regularly.
Allowing the tax authorities to take your VAT
Watch VAT and invoices.
You may face large fines and go through audits if you break VAT rules.

PAYE And Employees’ Records

The organisation should follow certain rules when making hiring decisions.

Registration of employers with the tax authorities
Through PAYE, income tax and National Insurance are collected.
Less tax and contributions should be made from an employee’s pay.
Provide Request to Inspect (RTI) reports after every payroll processing.
Failing to comply with laws may result in lawsuits, fines on your taxes or prosecution.

Observe The Business Rules Whenever Necessary

Active firms may have to follow other sets of rules, too.

Protecting consumer and employee data is done with rules such as GDPR.
Especially for the health and safety of buildings
The rules for trading are not the same in every industry.
You must be licensed in alcohol sales, food services, and financial services.

Difference Between Dormant Companies And Active Companies, Tax Implications

The following discussion is on the difference between dormant companies and active companies’ tax implications. Active companies face different taxes from those that are dormant.

Dormant Companies

You aren’t usually required to pay corporation tax.
They may be able to skip filing their corporation tax returns.
Do not apply for or claim VAT.
Remember to let the tax office know, as they may otherwise levy penalties.

Active Companies

All profits should be taxed by the corporation.
Submit your tax return every year.
It may require you to account for VAT and have a registration.
If a business owner employs staff, they are responsible for their taxes.
Company leaders who do not meet their tax duties may get fined, investigated, or have the organisation shut down by force.

Conclusion

Everyone involved in business, including owners, investors and regulators, should know the difference between dormant companies and active companies. Dormant companies do not complete business and so need little reporting, while active ones are continually active and must comply with regulations. Knowing about these differences helps a company maintain compliance and prevent problems.

Disclaimer: All the information provided in this article about “the difference between dormant companies and active companies,” including all the text and graphics, is general. It does not intend to disregard any of the professional advice.