The Government has unveiled support packages for the majority of limited companies and sole traders – but there is currently no specific financial help for directors paid in dividends.
Owners of small businesses set up as limited companies will typically pay themselves a small salary below the tax threshold and then pay themselves in dividends on top as and when they need the cash, as opposed to a traditional PAYE salary.
This means those directors of limited companies are likely to miss out on Government support during the COVID-19 pandemic – particularly those who are not considered to be ‘essential workers’ at this time.
It also means they won’t qualify for the Government’s Self-Employment Income Support Scheme (SEISS), which, when it starts in June, will pay grants of up to £2,500 a month to self-employed workers, based on business earnings.
It is estimated that nearly a quarter-of-a-million self-employed people will miss out on Government help. However, that figure doesn’t consider those who become directors of limited companies this year.
What steps can you take instead?
Below are some business rescue options, together with closure options if you think your business needs to close or is unlikely to survive the pandemic.
Company Voluntary Arrangements
A Company Voluntary Arrangement (CVA) can be implemented when a business is in trouble but shows signs of being financially viable and could still be profitable in the future.
The arrangement means all of the company’s debt can be transported into one manageable monthly payment, so it can carry on trading without worrying about the threat of liquidation or winding-up orders. petitions or liquidations being threatened.
The average cost of CVA is somewhere between £5,000 and £10,000, while the creditors ultimately decide the cost of supervising the arrangement.
Read more about Company Voluntary Arrangements
Pre-packaged or traditional administration will halt all legal action against a company. This will also stop creditors from winding up the company and give you time to explore your options.
An administrator (also known as an Insolvency Practitioner) will be called in to see whether the company can continue trading or be sold so that new owners can turn the company around. If it can’t be sold, the company will be closed down and the assets sold to cover its financial responsibilities.
At this stage, you may also consider voluntary liquidation, which will give you time to prepare to handle obligations such as personal guarantees, redundancies, and lease terminations.
If you’re facing the worst-case scenario of your business being unable to pay its bills, one option is to close your company and start again. Still, the law must be carefully considered as strict legal boundaries define what you can and can’t do.
This legislation is in place to stop directors dumping one company simply starting another to escape debts (and the consequences).
When your failing company has legally closed, you can continue to trade in a new business. There may even be the possibility of starting a new company with assets of the old, bought for the new business at more affordable costs.
Read more about Company Restarts
When a business finds itself in too much debt to recover through recovery procedures such as financing, administration, or a Company Voluntary Arrangement (CVA), it may be that a Creditors’ Voluntary Liquidation (CVL) is the only viable course of action.
When your company is in liquidation, no legal proceedings can be taken against it. Providing you have no personal liability for your company’s debts, your creditors will be unable to take any further action against you.
Read more about liquidation.
Voluntary dissolution can be used to close down your limited company under specific circumstances.
The process includes removing the business from the Companies House register, on which all official company data is displayed. Once the name is removed from this register, it will no longer legally exist.
The most important thing to remember is that you cannot dissolve your business if it has significant debts to its name, and you must meet several requirements.