Sole Trader selling share in company - implications?

johnmja

Hi there,

I run a business as a sole trader - business is good, I don't have any staff, but it could be changing. An old business contact (who I used to work for) has taken an interest in the business and wants to buy a share of it.

A few quid in my back pocket around now would be great.

So I'm wondering.

1) Should I convert my sole traders status to limited liability

2) If I do that, am I simply just giving him a % of the shares that he wants

3) And if so, am I then due to pay CGT on the sum that he gives me for the share (so I start out as 100% shareholder, and then 60% when he takes 40%).

My concern here really is best way to do this (and most effectively costed). Also, knowing where I stand on the tax implications of selling a share (I wouldn't put this sum back in the business).

I know I'll need to speak to someone (especially concerning company formation) but just wondering what you boardsies think is the best way of approaching this?

John

dbran

Hi Johnmja

Briefly

1) It is best to do it by converting to a limited company as partnerships are inherently dangerous and also messy.

2) Yes this is the case. If the business comprises premises, land or goodwill there may be CGT on the transfer to a company. This CGT is deferred if the consideration is all in the form of shares. If some cash is involved in the transfer this would trigger a CGT liability.

3) Yes this is the case but remember the CGT on the transfer is deferred not exempt. So this will mean the base cost of the shares you sell to the other chap will be reduced by the deferred CGT calculated in 2) above.

If you need to discuss any of the other things you mention please PM me.


Kind Regards


Dbran

kenbrady

The way I would do it.

You and the other guy set-up a limited company together. Divided up the company as you decide.

He loans the company the money he is investing.

This money is then used to buy the assets, goodwill etc of your sole trader business. This is what you will pay tax on. This can be a good tax efficient way to do things, as you might be able to use tax and retirement planning to limit your tax bill.

Instead of paying the other guy a salary, the company repays the loan each month. This reduces the need to pay paye,prsi etc..

wishful thinker

Both suggestions above are means of doing it in a tax efficient manner, but to get the right outcome for both parties (as generally a bit of give and take for both) one has to look at more than just the tax efficiency of the plan.....it must be agreeable to both parties

for that reason one would need to know more about your particular situation.......it is not difficult to decide what to do.......its just to do the most beneficial/agreeable for both parties.


Some thoughts:

• Have you valued your business yet? Are ye underselling your business?
• What are your/his intentions with the business?....are ye on the same wavelength?
• Have you got heads of agreement as to what he is hoping to buy into?

amen

have you though about what happens if there is falling out? Can you buy back his shares? what happens if he dies? Does his wife/partner/next of kin get his shares?

What happens if he doesn't contribute to the business?

I would do some sort of agreement where if after one year he has contributed x to the business he can have y of the company