How to incorporate your company in the US
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Sometimes things just aren’t working out and it’s time to close the company. That’s okay… but is it okay to then start a new company with the same name, doing the same thing? What if the new company does the same thing but has a different name? Can you raise SEIS/EIS in the new company? Will HMRC decide that your new company is just your old company reincarnated and disallow SEIS/EIS?
Ironically, the best outcome for your SEIS/EIS investors may be that you wind up your company so they can claim their SEIS/EIS loss relief, rather than just letting it go dormant while you stop spending money on it and find a new job.
At SeedLegals we periodically get asked about this so I recorded this video to answer these questions and more.
A note about taxes on winding up a company
The general rule is when a liquidation takes place, any cash balances in the company (or proceeds from the sale of any remaining assets) will be distributed to the shareholders as an equity gain as opposed to a distribution of income.
This effectively means the gain will incur tax at 20% (10% if you’re lucky and Business Asset Disposal Relief comes into play).
This is a beneficial position for the shareholders as it means they will pay a lower rate of tax than if it was considered to be an income distribution, whereby Income tax & NIC will be charged at the taxpayers prevailing tax rate (detailed below).
In light of this, specific tax rules were introduced that state:
Where a director of a liquidated entity that had distributable balances exceeding £25,000, looked to open a company with a similar name or business activity within 2 years of the liquidation date, any amounts that were previously charged to capital gains tax, will be converted into income tax profits.
This will occur where they are unable to prove that the original liquidation was for wider commercial reasons beyond the activation of beneficial tax rates.
Additionally but specifically for insolvent liquidations, there is a restriction on anyone acting as a director or shadow director of a company with the same or similar name at any time within the period of 12 months up to the company entering insolvent liquidation to 5 years after the day the company entered insolvent liquidation. For these purposes, an insolvent liquidation is a compulsory liquidation or a creditor’s voluntary liquidation as per s216, Insolvency Act 1986.
Income Tax Rates
| Income | Income Tax Rate (%) | National Insurance Rate (%) |
| £0 – £12,570 * | 0 | 0 |
| £12,571 – £50,270 | 20% | 10% |
| £50,271 – £125,140 | 40% | 2% |
| £125,141 + | 45% | 2% |
* the 0% Personal Allowance is available to all UK taxpayers, it will drop by £1 for every £2 earned between £100,000 and £125,140.
AI summary of the points covered in the video
The video addresses inquiries from founders considering the closure of their current company to establish a new one, often due to issues such as a problematic cap table, accumulated debts, or difficult investors in the existing company. It outlines considerations regarding the feasibility of starting a new company, the impact on Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) eligibility, and the implications of transferring intellectual property (IP) and business operations from the old company to the new one.
Key points include:
- Starting a New Company with Different Business Activities
There’s generally no issue in resigning from an old company and starting a new one in a different sector, as long as it doesn’t compete directly or reuse IP from the old company. - HMRC Scrutiny for Similar Business Operations
If the new company operates in the same sector as the old one, especially if it shares the same Standard Industrial Classification (SIC) code, HMRC may investigate whether the new company is a continuation of the old business, which could affect SEIS/EIS eligibility. - Transferring IP and Business Name
Transferring IP or maintaining the same business name and domain could further complicate SEIS/EIS applications, as HMRC might consider the new company a direct continuation of the old one. - SEIS/EIS Implications
The eligibility for SEIS/EIS in the new company could be jeopardized if HMRC deems the new company a continuation of the old one, potentially affecting the timeframe for SEIS/EIS benefits or disqualifying the new company altogether. - Investor Loss Relief
The transcript also covers strategies for ensuring previous investors can claim loss relief, which depends on the duration of their shareholding and the method of winding up the old company. - Winding Up the Old Company
The decision between voluntary winding up (if there are no debts) versus involuntary winding up (which requires an administrator and complicates starting a new business under the same name) is discussed, emphasizing the importance of considering investors’ ability to claim loss relief.
The overall message is that while starting a new company is feasible, founders must navigate legal and tax implications carefully, especially concerning SEIS/EIS eligibility and respecting the rights and investments of shareholders from the old company. Founders are encouraged to seek specialized advice to ensure compliance and optimize outcomes for both the old and new businesses.
