When you come to incorporate your business you are required to choose a type of company structure. Your new entity must therefore comply with the regulations and legislation for the decided upon business structure. Although sometimes after you have been running your business for several months, if not years of steady growth you may notice that your current company structure is no longer the most optimal for your business. If this is the case then you may want to change your company structure and this is what we will be looking at within this article.
What are the types of company structure I can choose from?
In the UK there are many different structures that can be used to operate a business. Which structure may work best for yourself would depend on the type of business that you wish to run, when a company is being run for a profit then a structure with limited liability would be desirable whereas if the company is a not-for-profit entity then the UK offers more beneficial corporation tax treatments to Charitable Incorporated Organisations (CIO's). Below is a list of the most common company structures in the UK:
- Limited partnership (LP)
- Limited liability partnership (LLP)
- Private limited company (LTD) - By Shares or By Guarantee
- Public limited company (PLC)
- Community interest company (CIC)
- Charitable incorporated organisation (CIO)
Each company structure has its own advantages and disadvantages, whether these are tax differences or liability protection, so it is important that before incorporating you plan ahead and think about what your goals are for the entity and how you plan on achieving those goals.
Key things to know before changing your company structure
When changing your company structure, sometimes referred to as restructuring, there are many different aspects that must be considered before going ahead with the restructuring. We are going to walk you through the most commonly overlooked factors restructuring:
1. You aren't able to simply just 'change' company structure
To change your company structure you are not able to simply just swap from an private limited company to a limited liability partnership. This would require incorporating the new limited liability partnership with Companies House, then transferring all existing contracts, which could include but is not limited to:
- Customer contracts
- Supplier agreements
- Leases on property and/or machinery
- Finance agreements
- Loans
Then after successfully everything into your new entity's name you must then either dissolve the no longer required entity or make it dormant, although, if you make the limited company dormant you must still keep up to date with its Companies House filing requirements alongside those of your new limited liability partnership.
2. Creating new credentials and reactivating all tax services within the entity's new Government Gateway account
Obviously, incorporating a new entity will require a brand new Unique Tax Reference number and therefore a new Government Gateway account must be created and the relevant tax services must be activated within the new entity's account, these could include:
- Corporation Tax - Activated by private limited companies, public limited companies & Community Interest Companies)
- Self-Assessment Tax - Activated by partnerships, limited partnerships and limited liability partnerships
- VAT - Activated by any for profit entity with turnovers in excess of £90,000
- PAYE - Activated by any entity that employs members of staff who are paid salaries
With activation of these services you will also be provided with a new VAT registration number which must be updated to invoices and/or the company website as well as a new Employer Reference Number which would be required to pay any of your employees through the new entity.
3. Capital Gains Tax
If the entity being closed has assets (property/shares/intellectual property) that it wishes to transfer to the new entity then this may cause a capital gain to arise, therefore incurring an increased tax bill due to possible recognition of gains on the assets.
4. Business funding and banking changes
Before changing the business structure it is important to review whether your existing entity has any business loans, overdrafts, assets on finance or investor agreements. If the business does have any of these then it may need to get approval for structural changes to the entity. Alternatively, it may need to get new guarantees and security documents written.
5. Shareholders rights could restrict restructuring
Before changing your company structure it is essential that you check the Shareholders' agreement and the Articles of Association of the existing entity as in order to make any changes you may require a majority shareholder approval before making any changes to the structure. The shareholders may also need to waive their pre-emption rights to shares as well as a possible drag-along clause which enables the majority shareholders to force the minority shareholders to sell their shares when the majority decides to sell the company.
6. Loss of reliefs or allowances
If you change your company's structure from a private limited company to a limited liability partnership then any corporation tax losses can not be carried into the limited liability partnership to offset any profits made, therefore losing the new entity will pay a higher amount of tax.
This could also lead to a the loss of Business Asset Disposal relief, R&D Tax Credits and any investment schemes which may be applicable.
7. Loss of business reputation and credit history
As you are restructuring which could entail a new name or new logo this could mean that your existing customers may speculate why you are restructuring or you may lose customers due to the new name, although this would depend on how you navigate the restructuring process.
A new entity would also mean that you would likely need a new credit file as there will be no trading history therefore if seeking finance through the new entity you may be asked to provide personal guarantees against the asset or loan which drastically effects financing of the business as lease deals, financing and loans would be harder to come by with no trading history.
Looking For Further Information?
Hopefully this article has highlighted the key things to think about before changing your company structure. For more information on topics relating to company formation feel free to explore our Knowledge Base. If you are looking for any further information about company formation, do not hesitate to contact us.
