One of the big attractions to running your business as a limited company has always been the idea that if things go wrong you can just shut down that company and start up again as a new company. Is this still true?
Well, there are now one or two problems:
- you may have given a personal guarantee as a director (or even as a shareholder) and closing your limited company down will not release you from this
- if this results in you becoming personally bankrupt, then you are disqualified from being a director until you are discharged from bankruptcy
- depending on the circumstances, if your company ceases to exist but still owes liabilities to its creditors, you may be disqualified from being a director for a period of up to 15 years.
- this could also happen if you are in breach of company accounting and reporting rules, or if you are found to have been ‘unlawfully’ (that is when the company is unable to pay its debts as they fall due)
- you may find that the new company’s reputation, credit rating and ability to trade is damaged by the demise of the previous company
Let’s say that none of these apply and you have a sound commercial or personal reason for wishing to wind up the company, but still want to keep on in a similar business.
Sounds OK, doesn’t it? And better still, when you dispose of your shares in a trading company you can claim Entrepreneurs’ Relief and reduce your Capital Gains Tax to 10% (so long as you meet the criteria for the relief). This is still the case if you decide to close the company via the shareholders carrying out a members voluntary winding up and distributing the assets.
However, beware of starting what is known as a Phoenix company, so-called because the legendary phoenix bird rises from the ashes of its death in flames.
If one or more of the shareholders of the wound-up company form a new company to carry on all or part of the same trade, then the risk is that HMRC will regard the winding up as being for the purpose of gaining a tax advantage – namely converting what would have been income into capital. This will allow them to treat any distribution as income and tax it as such and of course Entrepreneurs’ Relief would not apply.
Also, if you carry our a members voluntary liquidation, then you cannot set-up another business in a similar trade or activity.