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    In literal terms dormant means inactive or inoperative. This term when used in the financial or business industries can have different and significant meanings. There are two terms that are often seen are dormant account and dormant company. Both these terms have their own importance and are equally important to understand when entering the field of business or finance. This is why to understand the importance of the term “dormant”, when used with the words account or company, we are going to have a brief look at both these terms and try to understand them a little better.

    What is a dormant account?

    A dormant account is the one that has been inactive for a longer period of time. It can be your savings or current account which you have not used or made any transactions from in more than 12 months. If this happens then this account is termed as dormant. An account is also listed as inactive if you don’t make any withdrawals from it for more than 24 months. A dormant account had no role other than posting interest, but the statute limitations do not apply to this dormant account which means that the owner of the account or the beneficiary may demand funds from that account at any time.

    The Reserve Bank of India or RBI has set some guidelines on which it is decided when the account is considered dormant. According to these guidelines, if a client does not make any withdrawals in the form of cash from the bank branch or from the Automated Teller Machine or ATM, if the client has not made any payments by check or transfer of funds, then the account of this client is considered to be dormant.

    The accounts that can become dormant are checking and investment accounts, brokerage accounts, pension fund accounts, and other financial resources accounts. The period of dormancy of such accounts differs depending on the state and the type of account as well.

    For an account to become dormant, the owner of the account must have no activities performed from that account for a certain period of time. These activities may include logging into the account, withdrawals or deposits, all types of transactions, and making phone or internet contact with a financial institution. Periodic interests, dividends, savings or mutual funds are not considered to be a part of the operations that define a dormant account.

    The classification of inactive or dormant accounts, aim at reducing the risk of fraud. The identification of the dormant accounts is made to bring the dealing staff’s attention to the increasing number of dormant accounts. This is done so that extra attention is paid to the transactions made through these accounts and these transactions are tracked on a higher level to prevent fraudulent activities and suspicious transaction reports.

    Identification and classification of dormant accounts is also important from the tax point of view as at the end of every financial year you have to give details about all your savings and current accounts including the dormant accounts while filing your income tax returns. The income tax laws ask the taxpayers to produce the details of all bank accounts except for those that have been inactive or dormant for more than three financial years.

    What is a dormant company?

    Now that we have seen what a dormant account means and why it is important to know and classify the dormant accounts, let us discuss what a dormant company is and what the significance of a dormant company is.

    Any company is considered to be dormant when it has completely stopped trading and has not been undergoing any business that will bring it any form of income. There may be many reasons why a company can be dominant. These reasons include reservation of a company name prior to launching a business, restructuring of a formerly active business, in case the owner of the company wants to take a long period of leave, or if the company is acting as a holding company for intellectual property or other assets.

    In order to make an existing company dormant, all the pending bills and debts need to be paid off and the contracts need to be cancelled. All the agreements made with the customers should be terminated and all the due amounts need to be cleared. The wages to all the working staff should be paid off and all the taxes and VAT must be cleared. All the necessary processes that need to take place during the dismissal of the employees need to be carried out which includes closure of all the employee schemes and closure of all the business bank accounts. After a company has been made dormant, the owner can decide to make the company active again after following proper guidelines and completing all the required paperwork.

    As we already discussed, all existing business bank accounts of the company going dormant should be closed, and it is also advisable not to open any new business bank account for the dormant company. If a case occurs where there is payment that needs to be made after you have made your company dormant, then this payment should be made from a personal bank account.

    Once all the existing tax liabilities have been paid off and the company made dormant, this company no longer has to worry about paying taxes until they decide to become active again. Even if the dormant company does not trade itself, it can still act as a shareholder guarantor for another company. When a dormant company becomes the shareholder guarantor it agrees to make a certain amount of payment to the debts of the other company.

    Although non-dominant companies can be often confused with non-trading companies, both these terms are different from each other. While all dormant companies are non-trading, all non-trading companies are not essentially dormant. This means that even when companies are not trading and are not carrying out any significant business, the companies may still be involved in significant transactions. This is the reason why all non-trading companies cannot be considered dormant.

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