Client Error in Company Set Up

Client set up a non profit company for trading business - what is the best way to resolve this.

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We have started to Act for a New Client who started trading in April 2021 and wrongly set up there company as a Non Profit Company (Private Limited by guarantee without share capital), The company has two directors who are husband and wife. The business is trading and making a profit.

They have registered for PAYE with HMRC under the name of the company and paid wages to employees but no wages have been processed for the directors.

The company has been issued with a Corporation Tax reference.

Directors have taken "drawings" from the business - presuming these can't be classed as dividends as there is no Share Capital.

Transactions for first five months were done through joint personal account before new company bank account set up in month 6.

Any thoughts on how to resolve all of this?

It appears that options are:-

A) Prepare accounts for company up to 5th April 2022 and process salaries for directors to wipe out profits. Then cease the company and PAYE scheme and set up a new limited company (with shares) from 6th April 2022.

Though the quality of the accounting records and time scale may make this nearly impossible.

 

B) Dissolve the existing company and produce no accounts and cease the PAYE scheme for employee's on 5th April 2022.

Register the business as a partnership and prepare accounts for year to 5th April 2022 so that profits are assessed on the Husband and Wife.

Write to HMRC explaining the situation and advise that profits will be returned under self assessment and request that the existing CT record be cancelled.

Set up a new limited company (with shares) and new PAYE Scheme from 6th April 2022.

 

My preferred option is B but not sure if this will lead to complications down the line.

Have never come across a situation like this before and any thoughts would be appreciated.

Replies (16)

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By williams lester accountants
24th Mar 2022 12:28

You state what your preferred option is, but not what the client has instructed you to do when you presented them with the options?

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Replying to williams lester accountants:
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By 2156806
24th Mar 2022 12:33

The client won't understand the options they have just instructed us to try and get everything sorted out which is difficult giving the mess they have created. - I am just trying to figure out how to resolve this mess and move forward with a new properly set up company, but thanks for your input - very informative.

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By paul.benny
24th Mar 2022 12:43

There’s no such thing in the Companies Act as a not-for-profit company.

One of the reasons Limited by Guarantee is often used by non-profits, is that you can’t distribute profits as dividend (as referred to in the OP). I don’t think there is any obstacle to a Limited by Guarantee converting itself to a Limited by Shares.

Have you considered a status change by changing the Articles?

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Replying to paul.benny:
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By WhichTyler
24th Mar 2022 13:15

paul.benny wrote:

). I don’t think there is any obstacle to a Limited by Guarantee converting itself to a Limited by Shares.

others disagree https://www.completeformations.co.uk/companyfaqs/uk_company_setup/changi...

https://www.companylawclub.co.uk/converting-a-company-from-one-type-to-a...

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Replying to WhichTyler:
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By paul.benny
24th Mar 2022 13:26

CA2006 says almost nothing on shares vs guarantee and certainly nothing one way or another about changing status.

The linked articles say there is no procedure - as there is, for instance for converting plc to ltd or vice versa. And that may be a practical obstacle rather than a legal one.

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Replying to paul.benny:
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By rmillaree
24th Mar 2022 13:17

" I don’t think there is any obstacle to a Limited by Guarantee converting itself to a Limited by Shares."
I thought there always was - thats from memory mind so i could very easily be wrong - i have certainly never seen a company change from one to tother.

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Replying to rmillaree:
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By thevaliant
24th Mar 2022 15:15

I've never seen it either, but this has come up before and a more learned poster (probably) suggested it was possible and simply required the Articles to be changed.

What MIGHT be the problem is that Companies House designate a company as a 'type' and getting them to change it to something else could be the sticking point.

If the Articles can be changed, do that.

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Replying to thevaliant:
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By WhichTyler
24th Mar 2022 17:10

I think the word 'simply' is doing a lot of work in your response. I suspect the OP's clients pockets may not run to the legal advice needed for doing this never-seen-before, against-the-grain novelty

Maybe I'm a pessimist or lack vision, but if I had a dog and really wanted a cat, I would not be heading to the Crick Institute to commission research into genetic modifications...

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By rmillaree
24th Mar 2022 13:22

option B sounds like you are trying to make fact into fiction - so sounds totally the wrong option to me.

A sounds fine and dandy subject to caveats ref there are a few things that would matter ref technicalities of transfer - one thing to point out is that it could be tax efficient running salary into new tax year perhaps for first company.

I don't understand why poor accounting records would come into the equation ? you dont need to deal with this acounting records before starting new company do you.

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Replying to rmillaree:
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By 2156806
24th Mar 2022 17:47

The poor Accounting Records are an issue as the profits need to be calculated to get all of the profits out of the old company by salary as dividends can't be paid so the figures need to be accurate.

Running the salary into the new tax year is not an option as this is there only source of earnings and would mean them losing out on personal allowances.

They will have to take earnings from the New Company so don't want two year's earnings in one tax year.

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By fawltybasil2575
24th Mar 2022 16:51

I may post again if and when time permits. In the meantime, here is a link to the same question of legal PRINCIPLE, posed previously on AWEB:-

https://www.accountingweb.co.uk/any-answers/can-a-limited-by-guarantee-c...

Basil.

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By 2156806
24th Mar 2022 17:52

Thanks for all the responses so far -I had already looked into changing the company type and there is no easy mechanism for this and you can't take dividends with no shares. If only it has been that simple I wouldn't be on here asking the questions.

It seems strange that people who are not familiar with such matters who make a simple mistake have to go through a lot of trouble to unravel it - if only they had seen an accountant at the outset.

Having considered the matter further I am having to go with Option A so better start pulling the accounting records together (that will be fun).

Yet another addition to the increased workload - will we ever catch up.

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Replying to 2156806:
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By WhichTyler
24th Mar 2022 19:24

2156806 wrote:

Yet another addition to the increased workload - will we ever catch up.

With clients like these I would be asking if you will ever get paid...

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Replying to 2156806:
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By johnfrancis
25th Mar 2022 10:29

First, a guarantee company is a not-for-profit company because the model articles prohibit distributions. That can be changed - just delete or amend that one article by special resolution.

Then there is nothing to stop a guarantee company making a distribution to its members. It's not a 'dividend' (a word that I don't think you can find anywhere in the Companies Act) because that word generally implies shares. But you could make a distribution equally to the company's members, and that has the same tax consequences as a dividend.

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By fawltybasil2575
24th Mar 2022 23:10

@ 2156806 (OP).

Your 17.47 post states that:-

“ . . . the profits need to be calculated to get ALL OF THE PROFITS (emphasis added) out of the old company by salary . . “.

With respect of course, and unless there is some circumstance of which I am unaware, there would in at least 90% of cases be NO NEED to award salaries which equate to the EXACT profits figure.

Furthermore, since you will no doubt be broadly aware (as part of KYC) of the directors’ personal taxation positions, you should almost certainly be able to determine NOW (ie on or before 5 April 2022) the appropriate 2021/22 Salaries figures: I make such comment on the understanding that you will already be able, or will be able immediately on the basis of a discussion with the clients of no more than an hour, to estimate with sufficient accuracy the profit figure to date, by:-

(i) Asking for information re the current Net Assets (and the personal monies (a) introduced and (b) withdrawn); and
(ii) Discussing the nature of the business and the “story” of its opening year; and
(iii) Applying a “sense check” to assess the accuracy of (i) and (ii).

The Accounts can then be prepared, at greater leisure, AFTER 5 April 2022 (there is no particular reason why your suggested Accounting Period End of 5 April 2022 should be used). In the majority of cases, the original company will then have a Corporation Tax liability, which can be paid in the normal way. Frankly, if the estimated Corporation Tax liability is relatively small, then by submitting a letter to HMRC advising that the estimated profits are £xxx as per DRAFT Accounts submitted with the letter, they will probably agree to their not objecting to the striking off application if they receive payment of £yyy (the taxable profits at the CT rate).

As has been stated correctly by eminent members above, you MAY consider it appropriate to be placed partially or wholly in funds before commencing any material accountancy work (this would depend upon several factors); and/or you may wish to ensure that your Engagement Letter terms include a ”personal guarantee from the directors” element re your fees.

It is perfectly in order for a new company to be immediately formed, and for the Assets of the existing company to be transferred to that new company (unless there are any practical or legal reasons preventing such transfers), and for the new company to commence trading at the most convenient date.

If the NAME of the existing company is essential (or nearly essential) then changing the name of the existing company immediately (or as soon as is practicable) is advised. When the existing company is then struck off by the normal route, the new company should then be able to shortly thereafter take over the name of the original company.

I would also recommend the clients' taking legal advice on the employment law factors which arise from the employees' contracts being transferred to the new company.

In essence, there should be no reason to be unduly pressurised in dealing with this case, if the appropriate steps are taken as outlined above.

Hopefully needless to say, I am assuming that there are no exceptional circumstances (not mentioned in your original question or later posts) which would prevent the above steps being taken.

Basil.

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Replying to fawltybasil2575:
By Charlie Carne
25th Mar 2022 13:54

fawltybasil2575 wrote:

@ 2156806 (OP).

If the NAME of the existing company is essential (or nearly essential) then changing the name of the existing company immediately (or as soon as is practicable) is advised. When the existing company is then struck off by the normal route, the new company should then be able to shortly thereafter take over the name of the original company.

Basil.


Once you have changed the name of the existing company, the old name is available to the new company and there is no need to wait for strike-off of the old one. I'd recommend first forming the new company (with a new name), then change the name of the old company (which can be done within a day, I believe) and then change the name of newco to the original name of oldco. This leaves the shortest window of opportunity for someone else to swipe the name you want once oldco has released it.
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