Goodwill and loans

System

Please help!! Iwork for a limited company it was a sole trader business a couple of years ago but the owner is now the director of the limited company. He has had the goodwill valued but he wants to claim this goodwill as a payment to him how can this be done? bearing in mind that it is an old edition of quickbooks that is being used i typed goodwill into the help index and didn't get any response!

Also a car has been purchased for his daughter using money from the company, his daughter used to work for the company also as a director but has recently left so as a goodwill gesture the car was purchased for a value of £700. the director has suggested that this be put through as a loan. I am a little confused! We use a 2001 version of quickbooks!
Please help :?

System

Re:Goodwill and loans

If this goodwill is internally generated - it can't be recognised in the accounts so I don't know how you could pay it over to him.

I don't really understand what's happening with the car - who has actually purchased it for £700 the daughter or the company?

Annette

System

Re:Goodwill and loans

Just following on from Annette's wise words. I note you say the company was incorporated a couple of years ago.

One advantage (or should I say loophole) with incorporation a couple of years ago is that you could introduce goodwill into the Ltd co. at a value of £30,000. Without going into the technicalities it is basically that this amount would result in a nil capital gain after the annual exemption. This amount is subsequently credited to the directors loan account (what was the capital account in the sole trader or in other words what used to be "capital introduced") and is eligible for tax free withdrawal by the director concerned. These days there are ways of establishing whether or not goodwill does actually exist and the value to be placed on it.

However, the director has to first make sure that there was goodwill introduced into the business on incorporation - you could tell this in Quickbooks as it will be on the trial balance. If this is the case then you would do a journal crediting bank and debiting his loan account. NOTE the goodwill in the business belongs TO THE BUSINESS - not the owner. This is a common misconception with owner-managers.

On the assumption your manager has taken professional advice from his accountants and gets the money for the goodwill, then do the journal (credit bank - debit directors loan account). The goodwill still has to appear as an intangible fixed asset, the above journal simply reduces the corresponding credit to his loan account (or "capital introduced").

Insofar as the car is concerned I am going to assume the company bought the car for use by the daughter and the daughter purchased it when she left. The money received for the car should be treated as disposal proceeds (I am assuming the car is in the company balance sheet). Again, I am assuming your manager has taken professional advice from the accountants as there are tax implications to consider and the car should have been sold at market value to the daughter. The fact that it is your manager's daughter bears no relevance to the sales price of the vehicle. I appreciate your position and if I were you I would do what your manager says - treat it as a loan to the company and let the accountants sort it out at the year-end. You cannot dispute your manager's instructions.

Sorry for the lengthy post!

Kind regards
Steve

System

Re:Goodwill and loans

Thanks for your help it much appreciated!! unfortunately the goodwill wasn't recorded in the accounts so i will have to do that first!