I am in the process of changing company from partnership to limited. I would like some guidance on best ways to transfer assets (machinery, stock and website)
System of Law: England-and-Wales
Im happy to assist. Can i get back to you with a few questions and comments asap.
When an existing partnership business is incorporated ie is now turned into a limited company (nearly always a company limited by shares), the proper procedure is for the new limited company to be registered, a date chosen for the transfer of the business, and then for the partners to enter into a contract with the new company for all (or some) of the assets (whether machinery, stock and website etc that you mentioned) of the business to be transferred to the company in return for shares in it. The partners will then have limited liability in respect of all transactions that take place after the date of the transfer, but will remain personally liable for any debts incurred as partners before such date. E.g. If the existing business has assets worth £10,000 (whatever composition they may be) and has two equal partners, the assets will be listed in a schedule to the contract and, typically, transferred to the company in return for 10,000 £1 shares 5,000 of which are issued to each of the partners. Therefore the accounting treatment in Partnership's books is Dr Investment ; Cr Assets; And in Limited Company's books the accounting treatment is Dr Assets (whether machinery, stock and website etc that you mentioned); Cr Share Capital ( which ever split between nominal share equity and share premium).From an accounting point of view the most convenient date for the transfer will usually be at the end of the financial year of the existing business so that accounts can be drawn up for whole years and the partnership accountant should be consulted on this matter..Hope this clarifies and I wish you the best. If anything in my answer is unclear, please hit REPLY and let me know which part needs some follow up. Please also know that your expressed satisfaction with my answer is my top priority and i would greatly appriciate a positive rating.
Hi, Apologies for late response, i was away for some time. I would to learn a bit more about details. The company has already been setup, with all aspects you mentioned (shares, etc). I am more interested on how our stock will be transferred. I understand as we now own it personally so once the company changes the status it will 'owe' the directors money for it. Can you explain in more detail what tax we will be paying on it and at which point (when) ? Also - can you advise if you know about any compan. That can value our website - as about 60% of our business comes through it and it has around 400 visitors per day it certainly has a market value? If lets say all assets are worth 50k can we withdraw the money when we want providing company is making profits and has this money available without risking its position? And is it in a form of dividents or is it directors loan - what is the tax difference there between the two?With regards XXXXX XXXXX - what should work best - to pay very minimum or whatever we can under the personal allowance? I understand it may be a bit more complicated but whats the best advice on that? We do have our accountants but some quaestions i would like to have second opinion as well.Many thanksRaf
Apologies for not addressing the tax effect of the transaction. Obviously the transfer from partnership to a limited company is a transfer of capital, and can therefore could result in capital gains tax on sale of assets: equipment, fixtures and fittings, or even the business' reputation ('goodwill'). From the description of your case you are likely to get the Entrepreneurs' Relief. Additionally, it is likely that VAT will not be charged on the transfer of assets as the business will be transferred as a “going concern”. After your partnership is valued, and say you make capital tax gain of £50,000. The gain qualifies for Entrepreneurs' Relief, and Capital Gains Tax is due on £39,400 (£50,000 less Annual Exempt Amount £10,600). At the Entrepreneurs' Relief rate of 10 per cent your Capital Gains Tax due is £3,940.If you have worked out you do have Capital Gains Tax to pay, you need to report this to HMRC by sending a tax return. The latest you can register is by 5 October after the end of the tax year for which you need a tax return. You may have to pay a penalty if you do not tell HMRC in time that you have Capital Gains Tax to pay.On the sale price, yes the sale price can be treated as loan to the directors in the new company ie Dr Assets Cr Loan. The loan can then be paid to the directors when the company is profitable. It depends with how you want the funding to be treated. If you treated the intial injection of assets as equity in the company , then the cash paid out of the company is treated as dividends. If you chose to treat the initial funding of assets as loan then the cash payout can be treated as loan( plus interest) repayment. I either case you need to consider the most efficient way of extracting profits from your company as follows:1.DividendsThe current effective rates of income tax on a dividend are: nil for a basic rate taxpayer (rather than 20%) ; 25% for a higher rate taxpayer (rather than 40%); 36.1% for an additional rate taxpayer (rather than 50%).2.Loan plus interestThe interest charged, provided it does not exceed a commercial rate, will generally be tax deductible for the company. The company is generally required to withhold 20% tax, which is then paid over to HMRC. In the hands of the director/shareholder, the income will be taxable as savings income and charged at 20%, 40% or 50%, depending on individual circumstances (with a credit given for 20% tax deducted). The loan capital (that is being repaid) is not taxed.In terms of whether salary or dividends …the general rule is Low salary and high dividends. However you need to work out the most tax efficient tax mix. This link can further explain how to work out the right mix: http://www.cheapaccounting.co.uk/blo...se-from-april/With regards XXXXX XXXXX of your website: Of course, listing your site for sale on a site like WebsiteBroker.com will tell the market price instantly of what you can sell your site for in the real world. However since you are selling a business partly driven by traffic from the website (40%) or so, valuing a website may not be provide the complete valuation picture. One can value the business based on various investment valuation tools eg current cashflows ; comparable companies; company fundamentals and a range of other methods www.privateequityvaluation.com/. I presume that you expect the value to be about £50k, in that case you should probably go for online sites like odesk, elance, you can easily get a quote of $500 to do a valuation by some small firm. In the case of having not much luck on this, I can provide the valuation service, but I suggest you should probably try the sites above first.I have tried to provide as much information (more than what we normally provide for the fee). However If you are satisfied, could you please rate this with a positive feedback and; that would be greatly appreciated. If not completely satisfied, prior to leaving feedback, please get back to me and I will do whatever it takes as negative ratings affects my account badly.
Chartered Accountant >15 years + Qualified IFA
Many thanks - thats a lot of information - exactly what i was looking for.Raf
If you welcome. could you please click the ACCEPT button or rate it OK or better before you leave to ensure I get paid. Thanks.
One more question that comes to my mind - as we have some machinery i.e. printers which were on the partnership books from new and depreciation was calculated normally - should they be calculated on what's left basis or at the market value ?
With an asset purchase, the purchaser (new company) obtains the assets at current market-value. Capital allowances/depreciation / subsequent sale of the assets the profit will be calculated only by reference to the this current market-value. So you can sell the assets at market value for tax purposes, and trigger a balancing charge in the partnership, and claim higher WDA in company.
I'm sorry but I don't understand the answer ? What is WDA?Let's say we have a printer which was bough for £5K, 2 years ago. I'm not sure what normal depreciation was but let's say it is now still worth £2K. Will we bring to the new ltd company £2K minus depraciation used or just the market value regardless ? And how this will affect the partnership final accounts?
If you had assets of £5k and the tax written down value (TWDV) (the cost less the capital allowances to date) is,say £2,000, and you decide to sell at £3k to the new company. The balancing charge is calculated as sales proceeds: £3,000 Less TWDV £2,000; Balancing charge is £1,000 (£3k-£2k) and this balancing charge is subject to tax. The new company will get capital allowances (write down allowances –WDA) on the purchase price of £3,000. If you sell the asset at £2k, the balancing charge is £nil (£2k-£2k). The new company will get capital allowances (write down allowances –WDA) on the purchase price of £2,000. The same applies if you sell the assets at £10k ie sales proceeds: £10,000 Less TWDV £2,000; Balancing charge is £8,000 (£10k-£2k) and this balancing charge is subject to tax. The new company will get capital allowances (write down allowances –WDA) on the purchase price of £10,000. Therefore if you sell the assets high price from partnership to company, you trigger a higher balancing charge in the partnership, but you also claim higher capital allowances in company.41092.8083982986
Many thanks for your help, much appreciated.
You are welcome. A bonus would be appreciated :)