Readers question: My wife and I are both independent sole traders. My wife is an artist and illustrator and I run a small cafe. My question is, how do we change from being independent sole traders to registering as one company so that we can trade as one entity as a limited company?
Experts answer: The expert for this piece is Sophie Tyler from Dolan Accountancy, who explains that there are a few things to consider here.
New limited company
The new limited company would be incorporated and presuming you both will be Directors and also shareholders, you would need to consider the share split. If both lines of the trade make different profits, you may wish to each have a different shareholding in the company, thus to give you varied entitlements to the dividends paid from the company profits.
Shares of the limited company
There are different share structures which could achieve the above, for example, you could each have Ordinary shares and split, say 60:40 if the profits were going to be earned and split this way. Or you could consider an Alphabet share structure in which different rights could be assigned. You would need to discuss the implications of different shares structures with a limited company accountant to ensure you get it right when the new company is formed.
You can also look at a shareholder agreement, which is a document which can be drawn up, usually by a commercial lawyer, where it will be made very clear to each party how the share issue works and the expectations of each party.
Buying a sole trader business
You can choose to sell both businesses to the new company. It would be something to consider by using the services of a professional who can value the sole trader businesses, as you may potentially be able to include goodwill. This is something that is usually done via professional services, as you would not want HMRC questioning a goodwill calculation later down the line, and not be able to provide information on how the fair calculation was made.
There may be personal tax implications to consider when selling the businesses to the limited company and you would be best to get an accountant to give you some estimates of your Capital Gains bill beforehand so you aren’t in for a surprise when your next personal tax return is prepared.
Business assets
You will also need to consider the business assets being transferred to the new company, as they would need to be sold to the new company at a fair market value. It sounds as if the café business may have a lot of closing stock and assets to consider when changing the entity to a limited company!
The whole process can be a long-winded one, but I would advise you look around for a good accountant with experience in your situation so they can assist with the process, getting together the right paperwork, and ensuring the new limited company set-up is the right one for you.
More on limited company tax and sole trader vs limited company.
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