A Dormant Company is the one which is a registered entity, but is not currently active. It doesn’t trade & has no significant accounting transactions. Companies can either opt for having a Dormant status or in case of inactive companies the Ministry of Corporate Affairs declares that company a Dormant. Having a Dormant status saves the company from complying with various compliance applicable to limited companies as per the Companies Act. Thus it could be cost saving option if someone is not operating the company.
No specific definition of Dormant Company is given in the definition clause but the Companies Act 2013, says that where a company is formed and registered under this Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction, such a company or an inactive company may make an application to the Registrar in such manner as may be prescribed for obtaining the status of a dormant company.
Why would a Company choose to be a Dormant Company?
Now, the question arises why would someone opt for dormant status. Why even register a Company in the first place if you want to keep it dormant? or why not shut it down?
So, Dormant Status can be opted for the following reasons
- By start ups/ new entrepreneurs (for future project or to hold asset or IPR) : Entrepreneurs who are yet to start as an operating Company, or who want to get everything in place before getting into the market can apply for Dormant status.. For ex. You are ready with the idea & investment but still u need some time to operate actively,then you can register your company and apply for dormant status. And start your business in a short notice. Also if you have a unique name for your company but are not yet ready to start the business transactions then you can register the company and enjoy a dormant status to prevent your competitors from using the same name.
- By existing companies: There are many reasons a Company could decide to halt its trading for some time. For ex. a Company might be planning to get into a new venture , or the present business is not running that smooth so the Company decides to halt for some time and start again when circumstances change.So in such case should a Company shut down completely? No, it can opt for dormant status and regain its activity when things are in place. As having a dormant company till you start afresh is much more cost effective then winding up the company and registering again later when you are ready.