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Sole trader to Ltd


I have a client who has recently converted his status from sole trader to the limited company. At the date of the transfer his balance sheet is following

Fixed assets 10,000

Stock            10,000

Debtors         10,000

Liabilities       (80,000)

Prop account 50,000

Once I transfer the same balance sheet as a going concern to ltd company, then presumably the propertier account will become director loan account and becuase its a debit balance it will be considered as overdrawn and therefore Sec 419 implication.

I thought about bringing goodwill, however it wouldn't be justifiable and will easily be questioned by HMRC because of the losses.

Please let me know if there is a way around or if there is an error in the way I am calculating the transfer.


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You should carry the fixed assets, stock and goodwill into the limited company only.  The majority of the debtors and liabilities belong to him personally and need to stay as such (you haven't given us a breakdown of these, so I cannot see exactly what is in them).  He cannot shrug off the liabilities by incorporporating as these are personal debt to him.  He needs to collect in the money from the Debtors and pay off the liabilities himself.

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The creditors and debtors are all trade related another problem is that these can only be paid from the money receieved after the change of status from the new work. Now if the director withdraw the money to pay off his own liabilities then  we are again in the same sitution i.e. overdrawn director loan account and sec 419.


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asim, you need understand

the base legal and commercial issues involved.

But I'm unsure you even understand the bookkeeping "transfer" of debit and credits before you get to the legals?  If "prop account" is a debit in sole trader balance sheet, then it would be "transferred" as a debit to the company books, and the resulting correspondiong entry to DLA is a credit, hence will not be a S419 problem at all - it will represent monies owed TO the owner.

BUT   .....   your problem (in all senses of the word!!) is the liabilities.  Trying to transfer those to the company would of course create a debit balance on DLA hence a big S419 problem.

But in bookeeping terms, you have given us a net nil sole trader balance sheet.  So in bookkeeping terms, if you "transferred"all this edebits and credits to the company, then you would necessarily have a net nil DLA.

But before we go there, firstly, understand the owner cannot legally absolve himself of his personal £80k liabilities (and if he was operating as a sole trader, they are personal liabilities, and will remain so unless and until he gets the creditors ro agree to transfer their debts to the company ;  they would of course be mad to do so). 

So he may at the stroke of your pen do bookkeeping transfers from himself to the company, but they are not legally binding on the creditors.  In which case, they are not really third party creditors at all as far as the company is concerned.   Ditto with debtors.   Hence earlier comment by first poster.   So the owner can "assign" the debts and liabilities, but it's a bit of an empty exercise.

What, by the way, is the £50k "prop account"?

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More explaination

Prop is Proprietor account.

Secondly, in order to claim the incorporation relief, all assets and liabilties excluding cash has to be transfered to the new company.


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incorporation relief !!!

You must be kidding.   Can you explain what gain you think is being relieved?

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this is getting odder with each new posting by the OP

What exactly is the owner attempting to achieve by incorporating?

The only sure thing he seems to have done so far is possibly stuff up tax relief on his losses.  (Unless he has previously been able to claim relief for all his trading losses to date against other income in the tax years concerned?).

I cannot readily see what positives he has achieved.  Even his protection from FUTURE creditors (as already pointed out, he has of course no limited liability protection whatever from the £80k existing creditors) could actually be jeopardised by him trying to introduce a negative balance sheet.


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Insolvent company trading illegally

Besides the other replies I would point out that if a company is unable to pay its debts and is insolvent which is the case here, the directors have to either take steps to put the company back into a solvent state or cease trading - this is a companies act requirement.


I had a client who was a sole trader and financially in a similar position. Purely from a tax point of view there would have been savings from incorporating but he could not incorporate as he would not have been able to leave the creditors out of the company and walk away from them, and if he brought the creditors in then the company would have shown an insolvent state.


The inevitable happened - he went bankrupt.

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Right way?
I am having the same problem as one of my client wants to do the same.

Can anyone please provide the right way of doing this transfer?

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why exactly does your client wish to incorporate ?

Any suggestions will have to start with a clear answer to that basic question.

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I have always understood it to be the case that you could not incorporate an insolvent balance sheet.  The business owner will need to put sufficient capital in. 

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You are of course correct.  But it depends by what is meant by "capital".  To go right back to the beginning of this thread, the owner could have a debit DLA.

But of course that will open him up IMMEDIATELY to the prospect of trading insolvently or fraudulently if he does not maintain the company as a going concern and it subsequently went bust, and as noted, leave him open to personal liability (as director, not shareholder) for debts incurred AFTER incorporation.

(again, as noted, he remains peronally liable for debts incurred pre-incorporation anyway).

I have a horrible feeling the two posters' clients seem to think it is a means of evading personal liability for past debts.  As noted, it is not ; worse, it actually exposes them to personal liability for future debts incurred by the company.

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vdeepan3 and asimmalik78

do not seem to have replied as to what are the objective(s) of their respective client(s) for incorporating?

As a related aside, I note that the OP said "Once I transfer the same balance sheet as a going concern to ltd company" ; how can it possibly be a going concern unless you have an underwritten guarantee from the owner that he has the propensity to ensure the business is kept in funds to ensure debts are paid as they fall due.  Most especially when a follow up post says that the £80k liabilities will be paid out of the ongoing business !

Don't wish to be overly cynical, but it is sounding more and more like a scam by the person(s) incorporating?  Beware that you do not get caught up in it.


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Applogy for delay in replying I was on holidays


The objective of my client to incorporate is offer shares to key employees. The business at present is in red because of crash of the housing market but its now picking up. The client borrowed new loan to pay off the creditors and the loan is secured on the director personal property so therefore no abusue of the system.

We thought about making a partnership but its considered as costly because the employee will be given alphabet share and the shareholder will be changing from one year to other. If we have to setup the partnership then we have to keep on changing patnership agreements, therefore its ruledout.

My question only is if we bring goodwill to setoff the overdrawn loan account what could be possible justification. I believe goodwill is only the way around as the business is already struglling and it won't be able to afford 25% section 419 liability.

Any thoughts?


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you said in your original post that you could not see how goodwill could be justifiable.  What has changed your mind?  You seem to wish to make up entries in the books rather than understand or express the commercial situation..

You have entirely changed the story.  The client has paid off the creditors.  Therefore they don't exist.  So how can they be transferred?  He has a loan of £75k he has secured on his house (and used it to pay of his creditors).  How can this be "transferred" to the company?  What has he done taxwise with the losses he has incurred?   You say there are property assets concerned and that will make everything alright.  What and where are these?  Are these the "stock" of £10k.  And you expect this to grow at minimum fivefold to cover sole trader losses?  Can he transfer rights of some sort in these to put into the company?

Sorry, but it seems to get more and more convoluted and contradictory each time.  Over and out for me.

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alpha, beta, whatever

Alphabet shares in a partnership? That keep changing each year...

Can I have some of those?



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My client is quite keen in building up a name and reputation. What he believes is a llimited company will be well known and will accrue some goodwill. His business is a franchise and he is planning to open more stores.
Tax savings is a concern as well. Of course he feels it's better in case if the business fails one day.. a negative thought though!

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I'm sorry but your reasoning is almost as convoluted (to use another poster's term) as the OP.  (and incidentally,  if it is a franchise, how will the franchisee build up a name by simply having more than one store - does the franchisor not require they be operated under the brand of the franchise?  Or is this a "silent" franchise - they are pretty rare). 

And what on earth is the source of the negative net assets being introduced ab initio?

(if you mean he starts a limited liability company, which then purchases a franchise, that is not precluded of course.  But how come your client is transferring a negative balance sheet into the company?)

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