A dormant company is one that remains legally registered but does not engage in any business activities, such as trading, income generation, or financial transactions. While it is not active in operations, the company retains its corporate identity, making it a useful tool for entrepreneurs who wish to protect intellectual property, trademarks, or business names without conducting business. In India, the concept of dormant companies is governed by the Companies Act, 2013, which provides clear guidelines for obtaining and maintaining dormant status. This article explores the key aspects of dormant companies, including their status, benefits, and compliance requirements.
What is a dormant company
A dormant company is one that is legally registered but does not engage in any business activities such as generating income, trading, or incurring any significant financial transactions. It remains an entity in the eyes of the law, retaining its corporate identity, but operates in a state of inactivity. Dormant companies often serve as placeholders for future ventures or to protect intellectual property such as trademarks, patents, or business names.
A dormant company can be a useful tool for entrepreneurs or businesses that want to reserve a name or preserve valuable assets without engaging in active operations. For example, a startup might register a dormant company to hold onto its intellectual property or to ensure that its brand name remains available when they are ready to start operations. Although it is not required to trade, the company still needs to comply with basic statutory filings, such as submitting annual accounts and returns.
Concept of dormant company
A dormant company is defined as a company that has been incorporated and remains registered under the Companies Act, but it does not carry out any business activity. Essentially, a dormant company has no significant financial transactions, such as income generation, trading activities, or sales, within a financial year. The company may, however, still be active in maintaining records and submitting statutory filings required by the Registrar of Companies (RoC).
This concept is important for businesses that wish to retain their corporate identity or intellectual property without the obligations of active trading. For instance, a company might be set up with a specific business name that a startup intends to use in the future. By keeping the company dormant, it ensures the name is protected and avoids the risk of it being taken by another entity.
As a dormant company is still a legal entity, it enjoys the same protections under the law as an active company, such as ownership of intellectual property, trademarks, and the possibility of reactivation when required. This provides businesses with flexibility and a smoother transition into full-scale operations when the time comes. Once reactivated, such businesses might consider checking their business loan eligibility to meet their funding needs.
Is a dormant company allowed to trade?
A dormant company is not allowed to carry out any trading activities or generate income. If a company engages in trade, such as buying or selling goods, providing services, or entering into contracts, it will no longer be considered dormant and will need to meet the compliance requirements for an active company.
However, a dormant company is allowed to engage in limited activities without losing its dormant status. These include:
- Paying statutory fees such as government charges.
- Filing necessary forms and maintaining corporate records.
- Engaging in activities related to its internal governance, such as holding meetings or issuing shares.
- Holding intellectual property or business names without engaging in revenue-generating activities.
While dormant companies cannot trade, they can hold assets such as trademarks or patents. The company can be reactivated at any time if the owners decide to start operations. Reactivating the company is generally a simple process, but it does require informing the RoC and complying with certain formalities to resume business activities.
Dormant status under the Companies Act of 2013
The Companies Act of 2013 outlines the provisions for dormant status for companies incorporated under Indian law. According to the Act, a dormant company is one that has not conducted any business for a period of two consecutive years. This includes the absence of any significant accounting transactions, and the company has not been involved in trading or other activities that generate revenue.
What is inactive company?
An inactive company refers to a company that has no significant financial transactions for a particular period, typically a financial year. Such a company does not engage in any business operations, purchases, sales, or revenue-generating activities. It only carries out basic functions such as maintaining its registration and filing annual returns.
Inactive status is granted to companies that meet the criteria set out under the Companies Act of 2013, specifically companies that have not conducted any business activities in the last two financial years. The company remains legally registered but does not face the usual regulatory requirements of an active business, such as audits and extensive filings.
Dormant status provides a way for companies to retain their corporate identity while reducing their regulatory obligations. It also allows businesses to plan for the future without the pressures and costs of running an active company. If you're planning for future activity, you can also check your pre-approved loan offer to access quick funding when needed.
Reasons for achieving dormant company status
There are various reasons why a business or entrepreneur may choose to have their company declared dormant. Some of the primary reasons include:
- Protection of intellectual property: Dormant status can be used to protect trademarks, patents, or business names while avoiding the need to operate commercially.
- Future business plans: Entrepreneurs may wish to keep a company dormant while they prepare for future expansion or when they are waiting for an opportune time to start business operations.
- Cost-saving: By opting for dormant status, businesses avoid the costs of running an active company, such as taxes, operational expenses, and annual audits.
- Regulatory flexibility: Dormant companies do not face the same compliance requirements as active companies, making it easier for businesses to focus on other priorities while keeping their corporate entity intact.
- Reputation protection: Some businesses use dormant status to retain their brand name or business identity without risking it being taken by other entrepreneurs or competitors.
Opting for dormant status can be a strategic decision for businesses that need time to reorganise or for entrepreneurs who are not yet ready to engage in full-scale operations but want to retain their corporate identity.
Advantages of choosing dormant company status
There are several advantages to choosing dormant company status, especially for startups or businesses looking to preserve their identity without operating. Some of the key benefits include:
- Cost reduction: Dormant companies are not required to incur significant operational costs. They do not need to pay salaries, taxes, or undertake business activities, making them more cost-effective.
- Simplified compliance: Dormant companies face fewer regulatory obligations compared to active businesses. They do not need to maintain detailed financial records, undergo audits, or file comprehensive annual returns.
- Protection of assets: By keeping a company dormant, business owners can protect their intellectual property, such as trademarks, patents, and business names, without actively trading.
- Easier reactivation: Reactivating a dormant company is relatively simple compared to starting a new entity. Once the company is dormant, it can be reactivated by filing the necessary forms with the RoC.
- Time flexibility: Dormant status provides businesses with the time and flexibility to plan future operations without the pressures of managing day-to-day business activities.
For businesses that are not yet ready to operate but wish to maintain their legal identity or protect assets, dormant status offers a low-maintenance option.
Requirements for obtaining dormant status
To obtain dormant status for a company, certain requirements must be met under the Companies Act, 2013. These include:
- No business activities: The company must have no significant financial transactions or business operations for a minimum of two consecutive years.
- Paid-up capital limit: The paid-up capital of the company should not exceed ₹10 lakh for it to qualify for dormant status.
- Director’s declaration: The directors of the company must declare that the company has not conducted any business activities in the last two years.
- Shareholder approval: A special resolution must be passed by the shareholders to approve the change in status.
- Filing of Form MSC-1: Companies must file Form MSC-1 with the Registrar of Companies (RoC) to officially request dormant status.
Once these requirements are fulfilled, the company can apply for dormant status with the RoC, which will review the application and grant dormant status if everything is in order. This process allows businesses to maintain their legal identity without facing the regulatory challenges associated with active companies.
Steps for filing for dormant status
To file for dormant status, businesses need to follow a specific procedure as outlined in the Companies Act. These steps include:
- Board resolution: The first step is to pass a board resolution stating the intention to apply for dormant status.
- Shareholder approval: The shareholders must then pass a special resolution to approve the change in status.
- Preparation of documents: The company must prepare relevant documents, including financial statements, directors’ declarations, and other corporate records.
- Filing Form MSC-1: File Form MSC-1 with the Registrar of Companies (RoC) to request the change to dormant status.
- RoC review: After submission, the RoC will review the documents and approve the dormant status if all conditions are met.
This procedure ensures that the company complies with all legal requirements and is granted dormant status in accordance with the Companies Act, 2013. Reactivation can be done by submitting Form MSC-4 to the RoC when the business is ready to commence operations.
ROC forms for registering a dormant company
Here are the key forms required for registering a dormant company under the Companies Act, 2013:
| Form Name | Purpose | Timeline for Filing |
| MSC-1 | Application for dormant status | Filed once the company meets the criteria for dormancy |
| MSC-3 | Annual return for dormant companies | Filed annually with the RoC |
| MSC-4 | Reactivation application for dormant companies | Filed when the company is ready to resume business |
Annual compliance for dormant company
Dormant companies must fulfil certain annual compliance requirements, including:
- Form MSC-3: An annual return must be filed with the RoC, even if the company has not conducted any business activities.
- Financial statement: Dormant companies must file a statement of accounts and balance sheet, which generally shows no financial transactions.
- Director KYC: Directors must ensure their Director Identification Number (DIN) is up to date annually.
- GST return: If the company is registered under GST, it must file applicable returns, even if there are no transactions.
These compliance requirements help ensure the company remains in good standing with the RoC and avoids penalties. If your dormant company is registered under GST, filing the GST return is a key compliance obligation. Even if no business activities have occurred, the company is still required to file the return to avoid penalties.
How to make a dormant company active?
Reactivating a dormant company involves several steps, which may vary depending on where your company is registered. Here's a simple guide to help you reactivate a dormant company:
1. Contact the Bank:
- Update Information: Make sure the company’s contact details with the bank are up to date. Provide any documents needed to confirm your identity and authority to manage the account.
- Clear Outstanding Fees: Settle any pending fees or charges linked to the dormant account.
2. Contact the Company Registrar:
- Submit Documents: Reach out to the company registrar or the relevant government body in your area. Submit any required documents and pay the necessary fees to update your company’s registration.
- File Annual Reports: If your jurisdiction requires annual reports, ensure these are filed and up to date.
3. Taxation and Compliance:
- Tax Returns: File any outstanding tax returns and pay any due tax liabilities.
- Compliance Check: Make sure your company complies with all local rules, including business licences and permits.
4. Board Resolution and Shareholders’ Meeting:
- Hold a Board Meeting: Organise a board meeting to pass a resolution for reactivating the company. Ensure this resolution is properly documented.
- Shareholders’ Approval: If your company’s rules require it, hold a shareholders' meeting to approve the reactivation process.
5. Legal Assistance:
- Consult a Lawyer: It may be helpful to consult a business lawyer who specialises in corporate law in your region. They can assist you with legal requirements and paperwork for reactivation.
6. Financial Review:
- Financial Audit: Consider getting a financial audit done to assess the company’s current financial health and ensure all records are in order.
7. Business Plan:
- Update Business Plan: Review and update your business plan to reflect the company's current goals and strategies.
8. Market Re-entry:
- Marketing and Sales: Create a marketing and sales strategy to reintroduce your products or services to the market.
- Customer Engagement: Reach out to previous customers and clients to re-establish relationships.
9. Employee and Vendor Communication:
- Notify Employees and Vendors: If your company had employees or vendors before, inform them of the reactivation and any changes that may affect them.
10. Stay Compliant:
- Regular Compliance Checks: After reactivation, continue to ensure that your company meets all legal and financial obligations to avoid becoming dormant again.
Conclusion
A dormant company offers businesses a way to maintain their legal standing while reducing operational costs and avoiding regulatory burdens. By ensuring compliance with the necessary filings and maintaining a minimal level of activity, businesses can preserve their intellectual property and corporate identity for future use. For those looking to reactivate their business, exploring options such as a business loan can help provide the financial support needed to kickstart growth.
