Can I switch a limited company to sole trader?

Yes you can, says Simon Thomas of Ridgefield Consulting. But you have to follow these steps to wind up your limited company first

I bought and took over a small business a few years ago, a limited company. Sales now are far less and so a lot less admin is needed. Is it possible to change from a limited company to a sole trader?

It is certainly possible to switch from running your business as a limited company to running it as a sole trader; however, doing so is not necessarily straightforward. Closing down a company is also often referred to as “winding up” but how you go about doing this will be dependent on your business’s financial position.

Before proceeding with “striking off” your company (or, in other words, asking Companies House to remove your company from its register), you will need to tie up all loose ends first.

There are several administrative tasks you should ensure are completed first:

  • Pay off any outstanding debts as well as chase for any unpaid invoices due to your company
  • Complete your final corporation tax return
  • File your final VAT return (if your company is VAT registered) and then cancel your VAT registration – which you can do either via post or online if you do not intend to be VAT registered as a sole trader, or you can apply for a change in status if you would like to keep your VAT registration as a sole trader
  • Pay employees their final wages, or, if you are a sole director then decide how much to pay as your final director’s salary and dividends (speak to an accountant to make sure you are doing this as tax-efficiently as possible by making the most of allowances). Then you will need to shut down your PAYE scheme. If you will continue to have employees as a sole trader, you cannot transfer your PAYE scheme over and must start a new PAYE scheme instead
  • Close down your business bank account

>See also: 5 most common tax mistakes when you’re self-employed

How to close down a limited company

Once you’ve settled your company’s outstanding legal obligations, you can move on to closing down the company. There are two methods of closing down your company if it is solvent, but only one option if it is insolvent. To be solvent means the company is able to pay off all outstanding debts (including tax and salaries), so if you were unable to do all of the above it may be that your company is insolvent.

Striking off your limited company

The first way to close your company down if it is solvent with remaining profits of under £25,000 is to informally (voluntarily) strike off your company with Companies House. To do this you need to apply via a DS01 form alongside a £10 fee. You will only be able to close down your company using this method if you have not been trading in the three months prior to your application for striking off or have not changed your company’s name within the 3 months prior. When Companies House receives this application, they put out a notice in The Gazette which announces to the public your intention to close down the company. This allows any third parties to raise objections within three months of the publication (they’ll usually only do this if the company owes them any outstanding money). If three months passes without any objections, Companies House will announce the closure of the company in the Gazette.

Member Voluntary Liquidation

The other way to close down your company if it is solvent and has remaining profits of over £25,000 is to use a Members’ Voluntary Liquidation (MVL). This is recommended where a company has profits over £25,000 as it can be more tax-efficient to do so than an informal strike off. By using an MVL, you appoint a licensed insolvency practitioner who takes over your company to ensure an orderly dissolution of the company. To use an MVL, all directors or at least a majority of directors need to make a statutory declaration that the company is solvent by preparing a closing financial statement which is sworn before a solicitor. Once this has been done, the directors have five weeks to hold a shareholders’ meeting to pass a resolution agreeing to put the company into liquidation. A liquidator is then appointed, and the appointment will be published in The Gazette. From then on, the liquidator takes control of the company to settle debts, any legal disputes, realise assets and distribute the surplus funds to the shareholders.

If your limited company is insolvent

On the other hand, if your company is insolvent then you will need to use a Creditors’ Voluntary Liquidation (CVL). It is a similar process, whereby the director or majority of directors decide to pursue a CVL and hold a meeting for shareholders to vote in agreement. Again, a licensed insolvency practitioner is appointed as the liquidator and Companies House are notified to publish an announcement in The Gazette. The liquidator will then circulate a statement of affairs (which is a financial statement detailing the company’s assets and liabilities) to all creditors as well as a proposal on how any liquidated assets will be distributed. The creditors must vote to accept the proposal at which point assets of the company can then be sold off and any remaining debts are written off. Once all is completed, the company will be removed from Companies House.

>See also: What is a sole trader? A small business guide

Notify HMRC that you are now a sole trader

Finally, to switch back to running your business as a sole trader, you must notify HMRC of your new employment status as self-employed. If you are continuing the same business, then you should also inform any customers and clients of the change as well as include information on your personal bank details as the company’s bank account will now be closed.

Any references to your business as a company should also be updated – such as information that may be on your website or stationery.

Do not forget that you will still need to continue completing your self-assessment tax return but are no longer required to complete company tax returns.

Simon Thomas is managing director of Oxford-based chartered accountants Ridgefield Consulting

Further reading

Simon Thomas

Narciso Lubowitz

Simon Thomas is managing director of Oxford-based chartered accountants Ridgefield Consulting Ltd.

Related Topics

Limited company
Sole Trader

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