Accounting for change from sole trader to Company

whatawaster

Hi,

Long established sole trader business changing to a limited company from 01/09/2019.

I understand that CGT can be deferred on this transfer as the shares in the new company will be the consideration for the purchase of the business.

My question is really on how to handle:
Trade Debtors
Trade Creditors
Work in Progress

Do these balances from the sole trader at 31.08.2019 simply transfer to the company, so new assets/liabilities are created?

Or do we keep both businesses accounts open simultaneously for a time until all of the payables and receivables of the sole trader have been settled? With any monies related to the sole trader which are paid into the company account being booked to a directors loan account?

Hope my question makes sense, and thanks in advance for your help

dbran

Hi there

All of these should pass by delivery to the new company and the funds an then be lodged to the new company's account.

I would also keep the old bank account running for a while to catch those folks who have not updated you banking details and transfer the funds over to the company at regular intervals.

Kind Regards

dbran

whatawaster

dbran wrote: »

Hi there

All of these should pass by delivery to the new company and the funds an then be lodged to the new company's account.

I would also keep the old bank account running for a while to catch those folks who have not updated you banking details and transfer the funds over to the company at regular intervals.

Kind Regards

dbran

Thank you for your help,

Let's say for example on Day 1 there were:

Trade Debtors 100,000
Trade Creditors 50,000

And 10,000 €1 shares issued as consideration for the business.

My initial entry would be:

Dr Trade Debtors 100,000
Cr Trade Creditors (50,000)
Cr Share Capital (10,000)
Cr Share Premium (40,000)

Or should that last entry be a directors/shareholders loan account?

tanit

If what you are talking about is Sect 600 Transfer of Business Relief

• Work in progress is transferred on delivery
• Trade Payables will, upon Revenue concession and so long as it is for bona fide reasons, be allowed to go as a transfer on delivery
• Trade Debtors will be considered consideration and over a certain limit will disqualified the Sole Trader from availing of the relief.

Share Premium as far as I know should appeared in the Memoradum and Articles of Association (please correct me if I am wrong anyone that knows more). If not considered Share Premium and becomes Directors loan on formation and it is going to again count as consideration paid affecting Sect 600 relief

All that is from the CGT point of view and there might be more points.

Transfer of Debtors, as far as I know, would give rise to Stamp Duty considerations if transferred to the company.

With the assets you have mention there are no negative Vat implications so Sect 20 relief will not be affected (WIP is transferred on delivery) so long as both Sole Trader and company are both Vat registered and allowed full input credit for Vat.

davindub

Op, you probably want to get professional help with this, there are a few decisions that need to be made balancing stamp duty/ CGT/ cash extraction.

I don't want to be giving advice, but purely on what you have posted, no CGT would be due so s60 relief would be of no benefit and you would overpay SD on T rec's. But I think goodwill will be a factor here, which is a chargeable asset for CGT.

searay

whatawaster wrote: »

Thank you for your help,

Let's say for example on Day 1 there were:

Trade Debtors 100,000
Trade Creditors 50,000

And 10,000 €1 shares issued as consideration for the business.

My initial entry would be:

Dr Trade Debtors 100,000
Cr Trade Creditors (50,000)
Cr Share Capital (10,000)
Cr Share Premium (40,000)

Or should that last entry be a directors/shareholders loan account?

OP,

You aren’t taking account of the potential goodwill of the business which is an asset of yours and which you should get value in the form of a directors loan or share capital.

The company is regarded as a separate entity to you and the assets transferring should be at their market value.

In your example above, the net value of assets transferring is 50,000 but if somebody else was prepared to pay 250k for the business, the goodwill transferring is 200k. The company could owe you 250k for what you are putting in via directors loan or share capital.

There is some tax planning to be done here, but there are benefits to you in doing so if you’ve built up value in the business.

spoiler

As you asked yourself below is correct you should leave the sole trader open until all payables and receivables are paid.

Or do we keep both businesses accounts open simultaneously for a time until all of the payables and receivables of the sole trader have been settled? With any monies related to the sole trader which are paid into the company account being booked to a directors loan account?