Using a director's loan to introduce capital to a private limited company

Discussion in 'UK Accountancy' started by webview2004, May 24, 2005.

  1. webview2004

    webview2004 Guest

    Is it legal for someone who has just changed their business from sole
    trader to a private limited company, to 'introduce capital' by making a
    loan to the company (to avoid the hassle of issuing shares)? And to
    withdraw capital by repaying such a loan?
     
    webview2004, May 24, 2005
    #1
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  2. webview2004

    Peter Saxton Guest

    You can make a loan to the company and repay it but you still have to
    issue shares.
     
    Peter Saxton, May 24, 2005
    #2
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  3. webview2004

    David Floyd Guest

    Dependent on the Mem&Arts you may need to only issue 1 share the rest
    can be a loan.

    DF
     
    David Floyd, May 24, 2005
    #3
  4. webview2004

    Jon Griffey Guest

    Don't forget the issue of valuing the goodwill (if any) to be
    transferred.


    --
    Jon Griffey FCCA CTA
    Hackett Griffey
    Chartered Certified Accountants & Registered Auditors
    2 Mill Road, Haverhill, Suffolk, CB9 8BD

    Tel (01440) 762024

    www.hackettgriffey.com

    See website for disclaimers
     
    Jon Griffey, May 25, 2005
    #4
  5. webview2004

    sagelist Guest

    [1] Thank you everyone for such a generous answer to my question.

    [2] I would be very grateful if you could suggest a textbook that would
    cover the bases so I don't have to trouble you so much. All the texts
    I've come across are like Frank Wood's Business Accounts Vol 2; they
    seem to restrict themselves to introducing the differences between
    entries for a sole trader and those for a public rather than a private
    limited company. A textbook detailing the differences between the
    entries for a sole trader and a private limited company is really what
    I imagine I need (or are the differences so sparse that a text would be
    overkill) (or so vast no text would suffice)?
     
    sagelist, May 26, 2005
    #5
  6. webview2004

    Peter Saxton Guest

    The reason is because accounting is based on a few principles and the
    entries are easy to work out once you understand accounting. If anyone
    tries to make accounting entries without understanding they get in a
    mess.
     
    Peter Saxton, May 26, 2005
    #6
  7. webview2004

    Keith Guest

    Most succinctly put, sah!

    I salute you.

    Pity those '..few principles..' have become a stomping ground for every
    politically-inspired, greed-oriented, self-obsessed jobsworth that the
    Treasury can find.
     
    Keith, May 26, 2005
    #7
  8. The differences will (ordinarily) be:

    OUT - [Balance Sheet]: Capital Introduced, Drawings

    IN - [Balance Sheet]: Share Capital, Directors's Loan A/C (also called
    Current A/C), Dividends Payable
    - [Profit & Loss Account]: Directors Remuneration (Salary), Dividends

    Assuming there is no parallel trading the Assets and Liabilities of the
    Sole Trader business disappear down a black hole on the last day of
    trading, reappearing out of an equal and opposite black hole in the Ltd
    Company on its first day.

    As the other have hinted, unless you are confident with this it would be
    a good idea to pay for professional advice.



    --
     
    Troy Steadman, May 27, 2005
    #8
  9. What I've said here is correct but I should make clear that this is a
    retrospective journal made as long after the changeover as possible to
    allow everything to wash through the Sole Trader accounts.

    There should be no Trade Debtors, Trade Creditors or Bank Balances to
    carry across, just Fixed Assets, HP Liabilities, Bank Loans,
    Prepayments, Accruals.

    Nobody *ever* gets this right. New VAT scheme, new PAYE scheme, new Bank
    Accounts, same customers unaware that they are dealing with a different
    entity, is a recipe for a cock-up extraordinaire! Which is why...



    --
     
    Troy Steadman, May 27, 2005
    #9
  10. webview2004

    Peter Saxton Guest

    If a sole trader invoice gets paid into the limited company that is a
    directors loan.

    If a limited company invoice gets paid into the sole trader bank
    account that is a repayment of a directors loan.

    You need to ensure that the balance doesn't show you owing money to
    the company so you have to monitor it and make payments to the company
    if necessary.
     
    Peter Saxton, May 27, 2005
    #10
  11. What about Jon Griffey's Goodwill? Goodwill is my least favourite
    fungible asset, my tax brain is notoriously tax-hopeless, but even I can
    see there must be *big* things to consider here?

    How do you value Goodwill?

    Presumably it never appears in the Sole Trader Accounts but:

    DR Goodwill
    CR Directors Loan

    ....in the Ltd Co is a handy start.

    Is there a Chargeable Gain at that point in the Ltd Co? How do you
    write Goodwill off?




    --
     
    Troy Steadman, May 27, 2005
    #11
  12. webview2004

    Jon Griffey Guest

    There is likely to be a chargeable gain on the transferee.

    The holy grail is to get full BATR on this and take the 10% CGT on the
    chin and have the loan to draw down tax free.

    How to value goodwill is the tricky bit. Worth reviewing CG68011.

    http://www.hmrc.gov.uk/manuals/cg4manual/html/CG67130/16_0094_CG68011.htm
    --
    Jon Griffey FCCA CTA
    Hackett Griffey
    Chartered Certified Accountants & Registered Auditors
    2 Mill Road, Haverhill, Suffolk, CB9 8BD

    Tel (01440) 762024

    www.hackettgriffey.com

    See website for disclaimers
     
    Jon Griffey, May 27, 2005
    #12
  13. webview2004

    Peter Saxton Guest

    This is the point your friend with the funny website was pointing out
    in his unusual way.
    Within reason you do whatever you want.
    Perfect start.
    Why should there be a chargeable gain? It's a purchase.
     
    Peter Saxton, May 27, 2005
    #13
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