When a company decides to disincorporate or cease operations, it is crucial to understand the underlying reasons, the available options, and the strategic steps involved.
In Dis-Incorporation & Cessation, Paula Tomlinson explains that dis-incorporation refers to the process where a company closes its operations or transfers its assets and trade to continue the business in another form, such as a sole proprietorship or partnership. In contrast, cessation generally refers to the complete termination of business activities.
Why Companies Dis-Incorporate or Cease
There are a myriad of reasons businesses might choose this route. Key drivers include:
- Tax Changes and Financial Considerations: Over recent years, companies have faced increasing corporation tax rates and more stringent setup and compliance requirements from Companies House. Additionally, dividend tax rates have risen while tax-free bands for dividends have decreased (from £5,000 to £500), making shareholder compensation less tax-efficient. These financial shifts can prompt businesses to reconsider their corporate structure.
- Administrative Burden: The costs and hassle associated with compliance, filing, and maintaining a limited company have also increased, making it less attractive for some business owners.
- Operational Flexibility: Sole traders and partnerships now enjoy several advantages, including lower class four national insurance rates, higher tax-free thresholds, and extended cash accounting rules. These factors can offer more flexibility and financial benefits compared to limited companies.
Exploring Dis-Incorporation Methods
The process of disincorporation involves determining the most appropriate method based on the company's financial health and strategic goals. Broadly, the methods can be categorized into steps for solvent and insolvent companies.
Options for Solvent Companies
- Member's Voluntary Liquidation (MVL):
- Process: This involves a liquidator transferring trading assets to shareholders, paying off creditors, and distributing any surplus to the shareholders. Known for its flexibility, MVL allows for a "Friday-Monday" transition, where a business ceases as a limited company on Friday and resumes as a sole trader or partnership on Monday.
- Advantages: This method ensures all financial obligations are met and allows for efficient transfer and distribution of company assets.
- Requirements: The majority of directors and 75% of shareholders must agree to the liquidation. Moreover, directors must declare the company can pay its bills within 12 months.
- Simple Dissolution:
- Process: Directors manage this process by transferring trading assets, paying creditors, and distributing any surplus under £25,000. After ensuring the company has ceased trading and clearing all obligations, the company is formally dissolved.
- Advantages: It is relatively straightforward and less costly compared to MVL due to the directors handling the dissolution.
- Requirements: The company must not have traded in the last three months before applying for dissolution. All funds must be distributed promptly to avoid them being claimed by the crown if the company is struck off.
Options for Insolvent Companies
- Creditor's Voluntary Liquidation (CVL):
- Process: This involves appointing a liquidator to manage the company's assets, notify creditors, and determine the distribution to creditors based on available assets.
- Complexity: It is more complex than the solvent liquidations due to the need to balance creditor claims and potentially ongoing negotiations.
- Dormant Company Approach:
- Process: The company transfers its trading assets to shareholders but continues to exist as a dormant entity while gradually paying off its creditors.
- Advantages: This approach allows the company to maintain its status and name while addressing its financial obligations over time. Once solvent, the company may then go through a formal dissolution process.
Key Considerations and Steps in the Dis-Incorporation Process
- Immediate Compliance: It is imperative to distribute any funds promptly once the process begins to avoid complications and ensure assets don’t escheat to the crown.
- Creditors and Tax Filings: Directors must notify creditors, transfer trades appropriately, and handle final tax returns. It's notable that, recently, HMRC has stopped providing tax clearances in advance to liquidators, meaning quicker processes but requiring meticulous tax planning.
- Director and Shareholder Agreement: Consensus among directors and shareholders is crucial. Typically, the same individuals act as both which simplifies this requirement.
- Timing and Documentation: Careful timing and precise documentation are crucial. For instance, companies undergoing simple dissolution must not have changed their name in the last three months to avoid misleading creditors.
Practical Tips and Ethical Considerations
- Professional Guidance: Engaging a liquidator or a professional adviser, especially for businesses unfamiliar with the process, ensures compliance and smooth transition.
- Communication: Transparent communication with all stakeholders, including creditors and shareholders, helps maintain trust and avoids legal complications.
- Strategic Planning: Comprehensive planning ensures that the decision to disincorporate aligns with the long-term business objectives and financial health of the business.
Deciding whether to disincorporate or cease operations involves a detailed assessment of the company's financial state, future goals, and the changing tax and regulatory environment. By understanding the various methods of disincorporation, such as MVL, simple dissolution, CVL, and maintaining a dormant company, business owners can navigate this transition strategically. Engaging professional help and thorough planning will not only ensure compliance but also pave the way for a smoother transition to new operational structures.
For the full session, please click here. In this course, Paula Tomlinson covers the following topics:
- Reminder of the reasons for dis-incorporation or cessation.
- How to dis-incorporate – what are the choices?
- Anticipated theoretical tax treatments of dis-incorporation or cessation.
- Potential tax issues that may arise and need to be considered.
- What questions to ask and other factors to help you and your clients come to a conclusion.
The contents of this article are meant as a guide only and are not a substitute for professional advice. The author/s accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article.
