At one time, incorporating a business when profits reached a modest level was almost the default advice. Today, the decision is one to consider carefully, varying markedly between businesses, and some company owners may even be asking themselves if they still need a limited company. Should they be considering disincorporation?

With the changes that have taken place recently, it’s a very sensible question to ask!

The question is often prompted by rising tax bills following reductions in the dividend allowance and increases in dividend tax rates. In some cases, it may now be more tax efficient to trade as a sole trader than as a limited company. Tax, though, is only one part of the picture.

Let’s look at some of the key factors involved in disincorporating a business that can help you decide whether this is something you should consider.

Loss of limited liability

A limited company is a separate legal entity. While this does not eliminate all risks, it does provide a layer of protection between the business and your personal assets.

As a sole trader, that protection is not there. That means if something goes wrong, you could be personally exposed.

For some businesses, any risk is low and can be well insured against. For others, limited liability remains a compelling reason to stay incorporated even if there are few tax savings.

What happens to the company’s assets?

As a company has a separate legal status, disincorporation involves assets moving from the company to the shareholders personally.

This becomes an issue when property or goodwill is being transferred. The transfer will normally be considered to take place at market value with corporation tax payable, even if no money has changed hands.

This fact alone is a key reason why disincorporation needs careful planning rather than a quick decision.

How about VAT?

Ordinarily, when a VAT-registered business sells an asset, the sale will be subject to VAT. In many cases, the transfer of a business from a company to an individual can qualify as a transfer of a going concern. If certain conditions are met, then VAT is not chargeable.

Meeting those conditions is therefore vital to avoid the problem and an expensive VAT bill.

How is the company closed?

Once you’ve made your decision to disincorporate and moved the trade out of a company, the company itself needs to be closed down. In some cases, a members’ voluntary liquidation may be the best way to do this. This can be relatively costly and involves an insolvency practitioner.

However, for smaller companies, a voluntary strike-off can work. This is comparatively cheap and straightforward.

The method used to close the company will affect how reserves or retained profits distributed to the shareholders are taxed.

Ongoing tax position after disincorporation

As a sole trader or partner, profits are taxed as they arise. In other words, you cannot time when you extract income from the business, or retain profits in the business at a lower tax rate while it grows.

Some people find the cash flow effect of the tax payments difficult to manage.

Commercial and practical considerations

Putting the tax implications aside, disincorporation can affect:

• Contracts in the company’s name.
• Banking arrangements and finance agreements.
• Professional registrations and insurance.
• The perception of the business by customers and suppliers.

Is disincorporation a good idea for you?

Disincorporation is not just the reverse of incorporation; the tax system makes it easier to go into a company than to come back out.

If you’re thinking about disincorporation (and our view is that most small limited companies should at least give it some consideration given the recent tax changes) make sure you take the time to work through the numbers as well as the mechanics of the process.

If you’re thinking about disincorporation and would like advice on how disincorporation may or may not benefit your unique position, or just to chat through the theory, please get in touch. We’re very happy to work through the numbers and the mechanics of the process with you to ensure you’re properly informed and can be confident in your decision, as well as the timing and process that you’d need to follow.