Business Incorporation and Disincorporation

Incorporation and disincorporation are two key decisions to be made at different times in a business life cycle. This article covers the merits of each.

Should I incorporate?

There are too many different permutations of income and individual circumstances to be definite as to which structure is better.

You need to do the projections for both structures. Losses are more effectively utilised when a sole trader and usually it is better to start as a sole trader. Then, once into profit, incorporate to gain the commercial protection offered to the owner by the limited status.

There are income tax advantages to higher rate taxpayers together with national insurance savings.

Transfer of business to a limited company

If you decide to transfer your business to a company:-

Your sole trade will cease on the date of transfer.

The trading stock will be transferred at market value subject to you being able to elect to substitute the greater of cost or the price paid by the company if that would give a lower figure.
Similarly the cessation will give rise to a balancing charge or allowance but you can elect within two years to transfer the assets at tax written down value.
Any unused trading losses cannot be transferred to the company but you can relieve them against income received from the company e.g. salary, fees or dividends.
The chargeable assets of your trade that are transferred to the company give rise to capital gains tax. The computation of liability can be made in either of two ways. (Sections 162 and 165 TCGA 1992).
Stamp duty must be considered; it is not payable on stock, plant or goodwill but SDLT is payable on any transfer of the premises.

You will need to consider whether the company should be registered for VAT and whether the business is to be transferred as a going concern.

Should I disincorporate?

Trading stock

If the trade goes back to the original shareholders and as they are connected with the company, the stock will be transferred at market value. This is subject to an election to substitute the actual transfer value.

Capital Allowances

Balancing adjustments will need to be made taking the actual value at transfer again subject to the election to transfer at the tax written down value.

VAT

There should be no trouble as the transfer will be of a going concern.

Assets

These will give rise to the biggest problem. Substantial capital gains could arise and this will need careful attention with the appropriate professional advice.

Trade ceases

If it is decided to disincorporate, for corporation tax, the trade is treated as ceasing even though the actual trade may continue.

Accounting date

The accounting date ends on the date of disincorporation.

Losses

Unlike when a business is incorporated where any losses are carried forward, on disincorporation any losses are "lost."