There was a time when incorporating a business once profits reached a modest level was almost standard advice. Today, the discussion is more nuanced, and some existing company owners may even be asking themselves, “Do I still need a limited company?”

This question is often driven by rising tax bills, following reductions to the dividend allowance and increases in dividend tax rates. In some situations, it may now be more tax-efficient to operate as a sole trader rather than through a limited company. That said, tax is only one part of the overall picture.

This article explores some of the key considerations involved in disincorporating a business, helping you decide whether it is something you should be looking at.

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

As a sole trader, that protection no longer exists. This means that if something goes wrong, you could be personally liable.

For some businesses, this risk is minimal and can be adequately covered by insurance. For others, limited liability remains a strong reason to stay incorporated, even if the tax advantages are limited.

What happens to the company’s assets?
Due to a company’s separate legal status, disincorporation involves transferring assets from the company to the shareholders personally.

This becomes particularly relevant where property or goodwill is involved. Such transfers are typically treated as occurring at market value, with corporation tax payable, even if no money actually changes hands.

This is one of the main reasons why disincorporation requires careful planning rather than a quick decision.

How about VAT?
Normally, when a VAT-registered business sells an asset, VAT is charged on the sale. However, in many cases, transferring a business from a company to an individual may qualify as a transfer of a going concern. Where the relevant conditions are met, VAT is not chargeable.

Ensuring those conditions are satisfied is essential to avoid complications and potentially significant VAT costs.

How is the company closed?
In addition to transferring the trade out of the company, the company itself must be formally closed.

In some cases, a members’ voluntary liquidation may be the most appropriate route. This process can be relatively expensive and requires the involvement of an insolvency practitioner.

For smaller companies, a voluntary strike-off may be a suitable alternative. This option is generally more straightforward and cost-effective.