Incorporating a business once profits reached a certain level used to be a given.
Today, the conversation is more nuanced, and some existing company owners may be asking themselves, “Do I still need a limited company?” or “Should I disincorporate?
With the increased cost of National Insurance and Dividend Tax rates coupled with the administrative burden and stricter deadlines, it may be more cost efficient to trade as a sole trader rather than as a limited company. However, tax considerations should never be the sole driver of your business structure or long‑term strategy.
- A limited company is a separate legal entity which provides a layer of protection between you and your business. If you disincorporate, this protection is lost so if something goes wrong, you could be personally liable. Risks can be insured against but the protection of operating as a limited company might be a compelling reason to stay ‘incorporated’.
- Disincorporating involves moving assets from the company to the shareholders personally. This is an issue when property or goodwill is being transferred as the transfer will normally take place at open market value which will give rise to a Corporation Tax charge, even if no money has changed hands.
- When a VAT-registered business sells an asset, the sale will be subject to VAT. However, if conditions are met, the transfer of a business carried out by a company to an individual could qualify as a transfer of a going concern which means that VAT is not chargeable.
- The company itself will need to be closed. In some cases, an insolvency practitioner will need to be appointed to initiate a member’s voluntary liquidation. However, for smaller more straightforward companies, a voluntary strike-off could be better value. How you close your company will affect how the retained profits are distributed and taxed on the shareholders.
- After you have disincorporated, profits arising in your sole trader business are taxed as they arise (i.e. you are no longer able to retain profits in the business and control what you extract to manage your own personal tax bill).
In addition to the above, there will be further commercial and practical considerations, such as renegotiating business contracts and reviewing banking, finance, insurance, and professional registrations. You should also consider how your customers and suppliers may react.
Disincorporation needs careful thought and it is important to work through the mechanics and understand the tax implications. If you would like personalised advice on disincorporation, please give us a call on 01223 810100.
