Sole trader to Ltd Co

[ashawandco]

For those of you who have made the switch from sole trader to limited company, did you get a value for the business on transfer and was there any goodwill? I ask as an accountant with a new client who is a tree surgeon. Trying to get familiar with this world of yours!

[skyhuck]

I used to run a 2 businesses, one sole trader (not VAT registered) and one LTD Co (VAT registered).

 

I decided to move to just one business, so my LTD Co bought my other, I got a tax free sum for the goodwill.

 

Hope that helps.

[plippy]

av word with mark bolam, he was LTD but decided to change over to a sole trader

[landrover 101]

As an accountant should you not know the answer to this question yourself

 

As a lot of people on this forum point out it takes a long time to learn about tree care and become proficient at doing a safe job for clients whilst there are a lot of unqualified have a go to make a few quid tree companys about with no idea.

 

It also takes a lot of study time and exams to become an accountant with the relevant skills to advise people in business correctly as to do it wrong can cost them money in unnecessary tax. Are you a fully qualified accountant if so why are you asking as it is fairly simple to asses the correct course for the conversion to LTD company for someone suitably qualified.

 

Anyway rant over in answer to your question straight from my good wife's mouth (fully qualified accountant and tax adviser) If the sole trader is a sole trader as in a one man band and any good will is down to him personally then if the business where to be sold there would not be the same element of goodwill as if he was a sole trader with a number of staff working for him and the business could be sold without him personally being missed.

 

If he is able to theoretically sell up and transfer business and staff to new owner then there is goodwill to value.

 

If he was to sell up as a one man band and the purchaser of his name would not be guaranteed the same level of business as customers are used to him then the goodwill is reduced for the tax purposes you are asking about

 

It is no different a situation than you as an accountant would face if the client was a one man band plumber and wanted to convert to LTD company

 

 

Hope this is of help just needed to get rant over as she has spent many years studying to get to where she is now and seemed to think it was a fairly simple matter for anyone suitably up to speed

[Justme]

Not sure I get this.

 

If I was self employed & then went LTD.

 

I would still own the LTD company just the same. So no transfer of ownership & no payment. Any way how can the LTD company pay you a sit does not exist till the company is bought & who / how will it be paid?

 

Surely you are buying & selling it to yourself.

[landrover 101]

As a sole trader turning LTD if the business is valued for the purpose with goodwill of say £20,000 then you as director of said LTD company then get to take £20,000 out of the LTD company tax free as you put it in in the form of goodwill. If you get it wrong at the changeover stage and get a tax investigation and the taxman says the goodwill should only have been £5,000 then you are liable for the tax on the other £15,000 is the basic explanation.

 

 

It is nothing more than a paper excercise at the stage of forming the LTD company

[ashawandco]

Thanks for the replies.

 

Trying to ignore the arbuse (!) but I know how to make the transfer and I know how to treat the goodwill thanks landrover 101. Since you ask, I qualified about 20 years ago, but I can't claim to know everything - passing the exams is one thing, the real world is quite another. The rules also have a nasty habit of changing every year.

 

Justme: the Ltd company is a whole new legal entity and, while you do own it, it's distinct from you as an individual for both tax and legal purposes (which is why you can limit your own liability in the ltd co). There are various rules about how you should move your business from being a sole trader to being a ltd company. Most of those rules are to do with tax - specifically capital gains tax - and what value is given to the company on the transfer. Having a value for (certain kinds of) goodwill can give you a nice little tax benefit. Probably not a reason to make the switch on its own but it can certainly pay for the cost of doing do.

 

Anyway, the tricky bit with all this is calculating how much the goodwill is. This is all tied up with how you value a company (and with it the goodwill). I was hoping someone on this site might have had some relevant experience with this as these tend to be industry specific so a plumbing company of comparable size would have a different value to a tree surgeon.

[Justme]

Ah I see its tax avoidance lol.

[landrover 101]

As stated above valuing the business for the purpose you are asking will depend upon wether it is a one man band with few staff where the business is dependant upon him or if the business owner just sits in the office and goes out pricing and has a couple of crews doing the work for him as in that case selling it would from a customers point of view not change anything so the goodwill is worth more.

 

I didnt mean to come across abusive as such but a tree surgeon wouldn't ask an accountant how to start a chainsaw and cut a tree down they would be expected to know and as you have pointed out it is specialist tax area and getting it wrong can lead to tax penalties so why ask a tree surgeon

 

 

I just thought it a bit odd that as an accountant you where asking as when i asked the question to my wife she reeled off the answer as to how she would treat it straight away but you are the one with the clients accounts in front of you so value the business from that and then add for goodwill accordingly depending upon wether it is a small sole trader or one with a lot of staff

[ashawandco]

Mate, I'm not asking how to do the tax or the double entry. I'm asking whether anyone here had any knowledge (from personal experience) of valuing a tree surgeon's business - earnings multiples, etc. You quite rightly say it depends on the nature of his business, but it also depends on the specific industry. The guy I'm talking to is a one man band currently doing everything himself; he's only been going a year but seems to be doing well. There won't be much goodwill as it's a new business, but to get the best result that I can for him when he incorporates, I want to get the goodwill as high as possible and would like to be able to back that up.

 

It's not an accounting or tax question I'm asking, it's a valuation question and I was hoping that, maybe, some people in the industry might be able to help me. Perhaps not.