Is it possible to switch from Ltd company back to being a sole trader?

kazzamunga

Hi my partner and I set up a limited company for our vintage furniture shop last year with the two of us as directors, but I'm wondering if it's possible to dissolve the company so that my partner can just run it as a sole trader.

I know there are supposed to be benefits to having a limited company, but so far it's been quite a slow start – we started it with items we had ourselves, rather than taking out business loans or anything like that. Whenever we sell anything we have to spend a proportion of that money on buying new stock, so that making it profitable after expenses is difficult, and then accessing those profits has to be in the form of dividends, so it seems out of reach for us. 

If he was a sole trader, at least the money that came in would be his own, and then he'd just have to make sure he set aside enough for tax at the end of the year (which as it stands wouldn't be much!) – we've both been self employed in other capacities and know how it works, whereas the world of limited companies is pretty alien and doesn't seem to have many benefits when it's such a small concern at this stage. Is it easy to switch from one to the other? Is it advisable?

DullGreyGuy

It depends if you want to dissolve the company or make it dormant in case you decide to switch back.

Just remember that the stock is the company's property and so you'll have to buy it from the company at a sensible price before trying to sell it as a sole trader. 

kazzamunga

Ah, well that might be the dealbreaker then! We've got it to the stage where the company is paying for itself, our issue is just in accessing any profits...but if switching to sole trader means we'd be out of pocket, guess there's no point in looking into it!

Veteransaver

kazzamunga said:

Ah, well that might be the dealbreaker then! We've got it to the stage where the company is paying for itself, our issue is just in accessing any profits...but if switching to sole trader means we'd be out of pocket, guess there's no point in looking into it!

If it's your company then you would only effectively be paying yourself. It just has to be accounted for properly so the tax is accounted for mainly. 
If for example you bought the stock from the company at cost it wouldn't be any issue. 
Even if you bought it had a discount and you could justify it it would be ok, but obviously you'd then make a bigger profit in the sole trader company.

Though I'm not sure how you think changing from a limited company will help you access profits better, presumably your profit would be virtually the same?
Or is your problem more of a cash flow issue?

MobileSaver

kazzamunga said:

we started it with items we had ourselves, rather than taking out business loans or anything like that. Whenever we sell anything we have to spend a proportion of that money on buying new stock, so that making it profitable after expenses is difficult, and then accessing those profits has to be in the form of dividends, so it seems out of reach for us. 

As @Veteransaver says, it's not quite clear what the issue is; in practice there's little difference in how you access the profits whether you are a limited company or sole trader; if the profits money is there in the bank then you can spend it. 

There is a difference in how you represent the profits/drawings in the accounts and how you are taxed on those profits but that's a separate issue. Perhaps you could give a specific example of exactly what the problem is?

Just as a sanity check, I assume you have included the "started it with items we had ourselves" in your accounts so you can get this money out of the business tax free?

DullGreyGuy

Given this is a business holding stock cash accounting as a sole trader will make a difference -v- the business that must account on an accruals basis. It will all come out in the wash over a long enough timeline but makes a notable cashflow difference.

Veteransaver

DullGreyGuy said:

Given this is a business holding stock cash accounting as a sole trader will make a difference -v- the business that must account on an accruals basis. It will all come out in the wash over a long enough timeline but makes a notable cashflow difference.

Not sure how that affects cash flow, everything else being equal cash in cash out shouldn't change should it?

kazzamunga

OK I guess we need to understand better how this works. We are planning on speaking to an accountant about it soon, and have to get it sorted by October when we have to have our tax return completed. I have a separate income as a sole trader, so it's only my partner that needs the profits of this company as income, not both of us – but it was my understanding that that can only be done by setting him up as a paid employee or generating dividends and sending these to both directors. He can't just transfer money out of the business account to himself, however he labels it in the accounts, right? That's the difference between a Ltd company and a sole trader in my eyes – when I get paid, it's mine and I can do what I like with it. But when a company gets paid, it stays with the company.

kazzamunga

Also, as we clearly don't know enough about this and would like to have a much better idea before we go to see an accountant so as to limit costs and so as to not get into any further difficulties with it all...does anyone have any advice about books to read, or websites to go to, that might be able to explain these things in a nutshell? Or even in great detail? Much appreciated!

DullGreyGuy

Veteransaver said:

DullGreyGuy said:

Given this is a business holding stock cash accounting as a sole trader will make a difference -v- the business that must account on an accruals basis. It will all come out in the wash over a long enough timeline but makes a notable cashflow difference.

Not sure how that affects cash flow, everything else being equal cash in cash out shouldn't change should it?

Under accrual accounting sales are made when they are agreed not when you're paid and so you may have to pay VAT etc on the sale before you're paid. Similar buying stock doesn't come off your profits up front because all you have done is converted cash to a liquid asset whereas with cash accounting it comes off immediately as you no longer have cash.

Veteransaver

kazzamunga said:

OK I guess we need to understand better how this works. We are planning on speaking to an accountant about it soon, and have to get it sorted by October when we have to have our tax return completed. I have a separate income as a sole trader, so it's only my partner that needs the profits of this company as income, not both of us – but it was my understanding that that can only be done by setting him up as a paid employee or generating dividends and sending these to both directors. He can't just transfer money out of the business account to himself, however he labels it in the accounts, right? That's the difference between a Ltd company and a sole trader in my eyes – when I get paid, it's mine and I can do what I like with it. But when a company gets paid, it stays with the company.

You are allowed to just "borrow" money out the company via the directors loan account, though that isn't an efficient way of doing it and there are rules around having an overdrawn loan account I think. But as far as I know there is no reason why you can't borrow some cash until you set up the PAYE system or declare dividends.
But yes the directors need to be set up as paid employees so the company needs to register for PAYE and submit a monthly payroll return electronically.
Generally, if the director had no other income, they'd pay themselves up to £12,570 per year up to the personal allowance. It can sometimes be advisable to pay slightly less to minimise the employers and employees NI . 
After you've paid the directors a salary you'd generally then take further cash out via dividends, but you can't really pay dividends without a profit.
Don't forget that wages are tax deductible (so will reduce corporation tax, whilst dividends are paid after corporate tax). 
But this doesn't make any difference to cashflow so I think you might be getting confused between business cashflow and personal cashflow out to you.