Sole Trader to Limited Co incorporation

janine1986
janine1986 Registered Posts: 6 Regular contributor ⭐ ? ⭐
Hi everyone,

I have a client who is a sole trader, and has been for many years. He runs a successful business with a turnover of approx £800,000 per year.

He wants to now incorporate into a Limited Company.

To do this how do i transfer his assets / liabilities from the sole trader business to the Limited Company?

Also would Goodwill need to be calculated? if so, does anyone know how this can be calculated?

I have researched on HMRC and business link websites but there doesn't seem to be any clear advice.

I would appreciate if anyone could help me!

Thanks!
Janine

Comments

  • reader
    reader MAAT, AAT Licensed Accountant Posts: 1,037
    janine1986 wrote: »
    Hi everyone,

    I have a client who is a sole trader, and has been for many years. He runs a successful business with a turnover of approx £800,000 per year.

    He wants to now incorporate into a Limited Company.

    To do this how do i transfer his assets / liabilities from the sole trader business to the Limited Company?

    Also would Goodwill need to be calculated? if so, does anyone know how this can be calculated?

    I have researched on HMRC and business link websites but there doesn't seem to be any clear advice.

    I would appreciate if anyone could help me!

    Thanks!
    Janine

    Re: fixed assets, you can transfer the tax written down value of the general pool from the sole trader to the limited company. Say for example the TWDV in the sole trade general pool is £2,000; you would DR Fixed Assets and CR Director's Loan Account and enter the £2,000 into the general pool of the limited company and claim WDAs.

    I would bring in the sole trade assets and liabilities into the limited company via the director's loan account.

    Re: goodwill, I would suggest adding up the last two years worth of profits and confirming with the director that this is a reasonable valuation of the sole trade business relationships and other intangibles of the business. You should check your goodwill valuation with HMRC by completing Form CG34.

    Don't forget to declare the capital gain (i.e. the limited company has bought his sole trade business) on his personal tax return and claim entrepreneur's relief.
  • groundy
    groundy Registered Posts: 495
    I would suggest that fixed assets should be transferred and their true market value and not at the written down value. However, the reality is that most small companies transfer the assets at whatever value is best for tax purposes.

    I would suggest goodwill value is £10,000 unless the tax payer is likely to be HR and then look at the advantages of using £30,000 presuming the profit levels justify such a level.

    Not to disagree with reader but I have never completed a CG34 and have never had a goodwill valuation queried in much detail. In my opinion at such low levels it is often not worth HMRC's time to query.

    If the sole trader is married, is there any benefit in gifting some shares in the company to his/hers partner?
  • janine1986
    janine1986 Registered Posts: 6 Regular contributor ⭐ ? ⭐
    Thanks for your help!

    As for the profit remaining in the sole trader business, could this be transferred over to the Limited company?
    Also with Debtors - im assuming these cannot be transferred over to the Limited Company as he would still be personally liable for the debt? Is this correct?

    Thanks again for the help, i am quite confident in doing accounts for both sole traders and limited companies, but transferring from one to the other is something i have not had to deal with before!

    Janine
  • groundy
    groundy Registered Posts: 495
    You can not transfer profit. And yes any debtors or creditors would remain the sole traders if any were paid or recd by Ltd company then they would be dealt with through the dir loan for company. You would normally pay any creditors and collect any debts before closing the sole trader bank account and transferring to Ltd Co account.
  • jamesm96
    jamesm96 Registered Posts: 523
    Like any balance sheet item, the debtors and creditors could be transferred to the Ltd company, but it's probably easier to leave them there and start afresh in the Ltd co.

    With the goodwill; if the value is less than £10k then it's pretty low risk so, as Groundy said, you'll probably get away without having it agreed by the valuation office. I must admit, though, I tend to be very cautious on this sort of thing and cover my (and the client's) back by doing it anyway, and that way you can tell the client that you've agreed the valuation and it'll enhance the perceived value of your service.

    Also, if the business profits justify a valuation of, say, £50,000, then you wouldn't want to restrict the value to £10k just to avoid a Capital Gains tax bill for the individual. He'll be able to draw on the goodwill balance (credited to DLA) tax-efficiently, and it's not reportable as income (because it's a repayment of a loan) which therefore entitles him to increased tax credits (especially if he has children), or, if his salary / dividends take him into the high-rate band then the DLA balance can be used to keep his taxable drawings within the basic rate band.
  • janine1986
    janine1986 Registered Posts: 6 Regular contributor ⭐ ? ⭐
    Thanks everyone for the help!

    Janine
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