All great in theory but what happens if the reality of running a limited company outweighs the fantasy? What if you want to go the other way and go from a limited company back to a partnership or sole trader again?
Maybe keeping up with all the additional legal rules, requirements and obligations are just too much of a hassle. Perhaps the tax benefits of being a limited company doesn’t outweigh the extra stress not to mention the additional costs and constraints that they operate under.
You might not be having as much fun as you did and want to go back to those simpler, happier times. On the other hand, maybe your business isn’t doing as well as it was or as you hoped and cutting back is a way to either ensure its survival or you’re preparing the way for an orderly insolvency down the line.
Whatever your motivation, Disincorporation – the method to change the legal status of a company back to a partnership or sole trader, is the way to do it.
Some of the main factors to consider when disincorporation include:
- Capital Gains – including any ‘held over’ gains that came from the incorporation of the business
- Corporation Tax based on the cessation of a company trading
- Outstanding trading losses
- VAT – transfer of registration
- Shareholders’ tax positions on distributions from the company
- What happens to the company next – continuation, liquidation, striking-off or dormancy
Dissolution v MVL
There are lots of other complicated rules and clauses changing a business’ status including possible liability for Income Tax or Capital Gains Tax on the transfer of assets by the company and on shareholders if they dispose of assets at a future date.
If you have funds within the company to distribute to shareholders it becomes time to consider whether dissolution or a Member’s Voluntary Liquidation (MVL) would be the best method.
Under the current rules (the Corporation Tax Act 2010, s 1030A to be precise), there is a £25,000 cap on distributions made by the company. This means that if, on dissolution, the company distributes over that amount, even by £1, the whole of the amount is taxed as income whereas any amount under that figure would be taxed as capital and entrepreneur’s relief may be claimed which is currently set at 10%.
It should be noted that this does not relate to the amount of distribution per shareholder, but the total amount distributed to all shareholders. If there is in excess of £25,000 to distribute, from the company reserves, it is still possible to distribute the funds as capital, however the company must first enter a Members Voluntary Liquidation. You should also ensure you do not fall foul of common scenarios which may prevent you from claiming entrepreneurs relief.
Our expert advisors will set up a free initial consultation where we can discuss your situation and come up with the most sensible and efficient course of action together.