Bringing shareholder onboard. Best way

Kumejima

Hi,

I've been operating as a sole trader and built a viable and profitable business but wish to expand. I've managed to attract an investor who will put money into my business for a share of the new company I'm setting up to take over from the old business.
Problem is that the accountant told me I'd be liable to capital gains tax if I issue ordinary shares to the investor for his cash without bringing any other assets. There is a small amount of stock and capital equipment but nothing to make up the shortfall in the balance sheet except goodwill. If the investor pays €50K for 20% of the company I am then liable for CGT on the remaining 80% of the shares I'd hold.

This seems like a crazy situation where all the cash invested to grow the business would simply land me with a €40K tax demand. Can this be right? The accountant mentioned that taking on the money as a loan or in the form of redeemable preference shares would be two other options.

Anybody gone through this? All advice appreciated on how best to proceed.

dbran

Hi

There will be CGT, but it is deferred provided that when the sole trade is transfered to the company the consideration for the transfer consists entirely of shares in the new company. When you sell the shares later on though, the base cost for you will be the original cost to you as a sole trader and not the cost/value of the company acquiring the assets.

You then issue the shares in the new company to the investor for the value of the cash that he has invested.


Hope this helps


dbran

Kumejima

Thanks for the reply but really not following what you mean there. Can you maybe flesh it out in a bit more basic fashion.
Thanks

dbran

Hi

The company simply buys the assets of the sole trader business. The consideration for the purchase consist entirely of shares in the new company ie there is no cash element to the transaction.

The new company then issues new shares for the new investor for the price agreed.

There is no CGT on the transactions, but it is effectively deferered until such time as you sell the shares in the company. When you sell your shares in the new company the cost of the shares for CGT purpose will be the original cost of the underlying assets which were purchased by the sole trader business.

Dbran

TheCostumeShop.ie: Ronan

Agree Dbran here, theres also huge benifits to do it this way. The investor won't be subject to any costs that would arise if an ex-customer of the sole trader sued for negligence etc as its a different entity. There would be a big saving on due diligence also, which can be very expensive.

Kumejima

Thanks for the advice. Starting to sink in. One thing is about loans outstanding on the sole tradership - can they be easily transferred or am I better off paying them off out of the salary from the company?

Would transferring the shares have tax implications for my sole tradership, especially if I want to let that go?

Finally would you recommend buying a company off the shelf or starting a new one for this purpose?

dbran

Hi

Re the loans I would recommend paying them off personally and not bringing them across.

Re the share transfer. Maybe. If you do it now it may trigger a CGT liability however this will not effect business retirement relief so you should wait until u retire to sell up.

Off the shelf companies are supposed to be new. I would use a new one unless you know what the old one was used for in the past.

Kind Regards


dbran

antoinolachtnai

Looking at it from a commercial rather than tax point of view, whether the capital in the business is loan capital or equity capital (i.e., money you borrowed yourself then put into the company) makes a big difference to what the shares are worth.

If these are loans that relate wholly to the business, it would probably be best that they should be under the umbrella of the business.

You may need advice about commercial aspects (i.e., valuation) and legal aspects (i.e., what the shareholders' agreement will be) for the transaction you are considering, if you are not fairly certain what you are doing. I wonder does it really make sense to have an equity investment for this amount. Some sort of loan arrangement with an option to purchase equity later might suit better.

Tax-wise, if you keep the loans personally and are on the higher rate of tax, the company will have to make 200 euros or so profit in order to pay you enough into your hand to pay off 100 euros of debt. This does not seem like a great idea, if you can avoid it. What's more, you won't be able to write off the interest against tax. You would be able to if the loan were within the company.

Will the bank transfer the loan? Probably, if you give a personal guarantee. If not, you might be able to loan the money onwards to the company and probably have the same advantages as above, i.e, the money paid to you by the company to discharge the loan would not be subject to income tax since it would be repayment of a loan, not salary.

However, you probably need to get specific advice on this, tailored to your needs. At the end of the day it probably depends on what the amounts of money are.