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:
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.
Contact us if you think this level of change could help your business and be an answer to some of your problems.
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.
Some companies have a succession plan in place and ready to go so there is a minimum of fuss during the transition and the business can continue to survive and thrive afterwards without the founder.
For many smaller businesses, especially partnerships and sole traders, this seismic shock could prove insurmountable.
While some companies can continue as going concerns, loved ones, relatives or employees might not want to continue the business, especially if it was a labour of love for the departed. They may already have other careers or interests that would be incompatible with the hard work of running a business. They might want to sell it to somebody with the talent and interest to continue the business or realise that it might be better for its story to end with the owners.
Alternatively, if shareholders have differing views about the direction of the company then a legal succession battle could damage the business permanently as the energy and vision of the parties are directed at this struggle rather then the day to day running of the business.
Nobody likes to think about the inevitable but death is the one constant for everybody - the only variable in the equation is when.
All businesses should have a succession plan, not only to ensure an orderly transition but one that can be implemented following any unforeseen calamities. At the very least these must include essential components such as digital legacies including login details, passwords, access to email correspondence and cloud storage as well as financial essentials such as access to bank accounts and up-to-date information on assets, liabilities, debtors, creditors, payment schedules and more.
After duly considering all the available evidence and factors, if the best option is to close the company then a Members’ Voluntary Liquidation (MVL) process is the most efficient.
Processes like administration and liquidation are widely associated with business failure but this isn’t the case at all. Many otherwise successful and solvent companies have closed using an MVL for a variety of reasons. Not just unexpected bereavements but retirements or family businesses when nobody was available or able to pick up the reins.
The process is relatively simple. An insolvency practitioner reviews the assets and liabilities of the company to make sure that all creditors including future and contingent liabilities, can be paid within the first year of a liquidation. They will then certify a declaration of solvency that will allow the liquidation of the company to go ahead.
Alternatively if the company is struggling and becomes insolvent then administration can be a solution. It will freeze all creditors demands and allow time for all pertinent financial information to be gathered together and examined thoroughly.
An administrator is appointed to run the company on a day-to-day basis while they do the important and necessary job of preparing the company for the process. Ultimately the company could still come to be liquidated or dissolved, it could also be sold to a new owner wholesale as part of as a pre-pack administration.
This is where an insolvency practitioner prepares the business and its assets to be sold as a going concern and that the marketing for sale and sale terms are set out ahead of entering the formal insolvency procedure.
We’re always happy to talk to people about the future of their business. Especially if the future is unclear or the decision about the business’s future has been made and you don’t know the best way to proceed.
If you’re an employee in a company that is facing these issues then there is also support for you and your colleagues from the National Insurance Fund.
Contact one of our expert advisers today to set up a consultation where we can discuss the best options for the business and for you.
As mentioned earlier, this article will outline the procedure for the arrangement and when it is considered appropriate.
A business partnership is similar to a sole trader. The very definition of a partnership is two more individuals running a business together to make a profit. If there is a partnership agreement, this will define the role of each partner, their obligations and their stake in the partnership. There are advantages and disadvantages of a partnership when compared to a limited company. The main business partnership advantages are:
The main disadvantage is that if the business partnership was to enter financial struggles, you and the partner are jointly and severally liable for the entire business debt. Should one of the partners fail to contribute or becomes insolvent, the liability of the debt falls to the other partners. This will even apply to partners who have retired or if there is a fallout between partners. A clean break is not as easy with a partnership as with a limited company.
If the company does suffer major cash flow issues, a partnership voluntary arrangement may be a suitable option. This will allow you to work together to a repay a large proportion of the monies owed to your creditors.
Similar to a company voluntary arrangement (CVA), the partnership voluntary arrangement is designed to provide the creditors with a higher return on the debts. The PVA also offers the opportunity to restructure the business model in an attempt to return to profitability. You and your partner will come to an arrangement to repay a certain amount each month, over a set period of time.
The PVA procedure will be overseen by a licensed insolvency practitioner (IP) who will outline affordable monthly repayments and distribute the amounts. The arrangement must be accepted by 75% of the creditors voting on the proposals. However, it will bind all creditors pre-dating the arrangement. PVAs, generally, last for around three to five years with creditors accepting the amounts paid under the partnership voluntary arrangement in full and final settlement.
It’s also important to note that the partners must be dedicated to making a success of the business and can make the realistic monthly repayments. Partners may even be required to undertake individual voluntary arrangements (IVA) alongside the PVA to safeguard the business and protect from personal bankruptcy petitions. More information on individual voluntary arrangements can be found here.
A partnership voluntary arrangement should only be considered where changes have been made from historic trading to make the business viable. This may mean cutting costs and making redundancies to ensure a monthly payment can be offered to creditors. If assets are to be sold as part of the arrangement, the PVA can also offer the time to sell these company assets at a better value than that of bankruptcy.
If you do decide that a PVA is the most appropriate route for your business, you should start by listing all of your creditors and their debts. One of the many business partnership advantages is that you do not have to do this on your own, but together with your partner to list the company liabilities and assets. It’s important that you do not exclude any liabilities and attempt to put realistic values on both them and the assets. From there, you can decide whether the company can prove profitable with these current overheads by preparing cash flow forecasts. Alternatively, if you are in need of a complete business restructure.
You must outline a proposal as part of the partnership voluntary arrangement, detailing the reasons the business has failed and the current financial issues. The PVA proposal will also include extensive detail on the structure of the procedure, the amount and how the creditors will be repaid.
For the creditors to decide whether to agree to the arrangement, the proposal should also contain a statement of affairs. The statement, essentially, sheds light on your financial situation and the outcome should the arrangement be approved. The document will also state how long the arrangement will last.
Of course, the primary aim of all businesses is to ensure profitability. However, if your company does fall into cash flow problems, there are many business partnership advantages to a PVA over compulsory liquidation.
Similar to a company voluntary arrangement, the PVA allows partners to retain control of their business and continue to trade. The primary aim of this procedure is to breathe new life into the company and return the business back to profitability. However, if you do allow the debts to build up, it’s highly likely the creditors will submit a winding up petition to close the business.
While there are other business partnership advantages to consider before entering a PVA, it’s worth noting that this process prevents the creditors from taking any further legal action against your partnership. You and your partner are afforded the necessary breathing space to deal with the debts and, hopefully, transform the business.
The business partnership agreement for the PVA also works in the best interest of the creditors, providing them with higher returns than that of winding up the partnership. However, it is important that you deal with these debts early on and seek critical insolvency advice to avoid compulsory insolvency.
We do recommend you seek immediate insolvency advice if you spot the early signs of financial trouble. Our business rescue experts will look to find the best solution to help your business return to profitability.