2 sole traders merging to become a limited company what do they need?

2 sole traders merging to become a limited...

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Hello,

I have a client who is doing well in her business. She has decided that she and another lady want to join forces and become a ltd company. My client has been trading for 5yrs and the other 2yrs, they compared their last set of accounts and my client made about £14k more. They both decided that the other woman would pay my client £10k and start the business on an even footing.

My question is, I have never dealt with a merger - granted this is a small one or merger of sorts. What should be done? because now the other woman has contacted her accountant who says why should she buy into the business.

I am confused. My thinking is they both invest the same amount of money and start from there, is this a simplistic view?

Please help. Thanks.

Replies (10)

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By johngroganjga
23rd Sep 2014 10:49

This isn't a merger.  It may

This isn't a merger.  It may be a transfer of two businesses into a limited company.

First step is to take instructions on what the shareholdings in the new company are to be.

The next step is to ascertain what business assets, including goodwill are being transferred into the new company, and at what agreed values.

When you have agreement on those issues you can move on to implementation. 

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By matabele
23rd Sep 2014 11:32

And don't forget to suggest a shareholders agreement

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By WallyGandy
23rd Sep 2014 11:52

I feel the other accountant has upset the issue by denying the £10k payment his client has agreed to make at this stage. I wouldn't challenge this advice- pretend you're acting for "Other Woman" and consider her business skills, time devotion etc etc. Some attributes are intangible.

On the face of it, a 50:50 shareholding from the get-go seems dangerous to your client especially as the "Other Woman" has a lesser established business.

This is where the shareholders agreement should be critical- it needs very careful attention.

The arrangement they propose is more of a proposed partnership, where one "buys in" or, alternatively, profit shares evolve into parity after a given number of years.

If that scenario can be incorporated into a shareholders agreement, then off you go. But in your shoes, I'd get a solicitor to draw it up- independently of client interests.

Alternatively, unless there are huge tax advantages, a "courtship in partnership" may be less constraining, then incorporate after they find they can work together. Shouldn't take long to discover that aspect!

 

 

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By pauld
23rd Sep 2014 12:02

Reasons

What are the reasons for wanting to join forces? e.g. tax savings? benefits for the end consumer?  why a limited company and not a partnership?

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By StephenElms
23rd Sep 2014 12:57

Partnership: more flexibility with expenses

I would direct the ladies concerned towards a partnership - unless a limited liability is prerequisite. Company cars are expensive, whereas in a partnership they can claim much more in the way of running expenses.

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Replying to pauljohnston:
blue sheep
By NH
23rd Sep 2014 15:11

why a partnership?

StephenElms wrote:

I would direct the ladies concerned towards a partnership - unless a limited liability is prerequisite. Company cars are expensive, whereas in a partnership they can claim much more in the way of running expenses.

Not sure I understand what you mean by "in a partnership they can claim more expenses", unless I have misunderstood your point this is simply just not true. Without knowing the full circumstances there is nothing to suggest a partnership would be better than a company

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By User deleted
23rd Sep 2014 13:27

A good ...

... accountant!

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By User deleted
23rd Sep 2014 15:46

There is always ....

... splitting the difference - LLP!

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By Briar
23rd Sep 2014 15:46

A good accountant ...

with knowledge and experience!

Why not sell both businesses to the new company (using Entrepreneurs Relief especially on the Goodwill (if it isn't personal goodwill)) but with very small share capital (e.g. £1 share each) thus leaving larger Directors Loan Accounts (tax-free drawings).  Why indeed should one of them pay £10k into the business? That will be taken into account in the Goodwill valuations and hence the level of DLA's at the start. If the "junior" is expected to pay £10k to the "senior", then isn't that double counting? I agree with "junior's" accountant.

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blue sheep
By NH
23rd Sep 2014 16:03

agree with briar

I agree, it is the company that should be paying for the extra 10k goodwill by way of a higher DLA not the individual, but be sure to get a good shareholders agreement or the extra 10k might never be paid (ie a limit on divis until both accounts are cleared or something like that) 

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