skip to navigationskip to main content

Phone: 0141 248 7411 

Email:

Choosing a Service

Choosing an accountant that matches your needs

Sectors

Robb Ferguson provides specialist advice for...

icon-free-consultation

Free Initial Consultation

Understanding your accountancy requirements

Request a Callback

Lets talk at a more convenient time for you

Goodwill on Incorporation

Newsletter issue - October 2012.

Trading as a company is generally more tax efficient for profitable businesses; the tax rates are lower and many tax reliefs are only available to companies. Certain professions which were previously prevented from operating as a company, such as solicitors, can now incorporate.

If your business is loss making it may be better to remain as a sole-trader or partnership until those losses are fully relieved.

When incorporating a business, great care should be taken over the value of assets which are transferred to the new company, including the business goodwill. It is generally fairly easy to value fixed assets such as buildings or equipment, but goodwill of the business will depend on a number of factors and may not exist at all for some businesses. Examples of factors to consider include:

  • Reputation of the business;
  • Ability to generate future sales or fees;
  • Customer & staff loyalty; and
  • Location of the business.

A common approach is to estimate the capitalised value of the future profits of the unincorporated business and adjust for non-recurring items of income or expenditure. Adjustments will also be required for differences between the structure of the old partnership and the new company. The directors will be paid a salary, whereas the former partners took a profit share. Interest on borrowings will be paid by the company instead of by the partners.

Once a goodwill figure is established it can be included as part of the price to be paid under a sale agreement that transfers the business to the company. It is a good idea to include a price adjuster clause in this sale document, so if the Taxman challenges the value of the goodwill any outstanding amount of sale proceeds due to the former owners can be adjusted.

Where the former owners become directors of the new company, it is common practice to leave part of the sale proceeds owing to those individuals as loan accounts within the company. These loan balances can then be drawn down gradually from the company with no tax to pay. However, the former owners may have to pay capital gains tax on the transfer of the business to the company.

If you are thinking of incorporating your business, please talk to us first, as there are lots of details to hammer out which will be specific to your business.

Not everything is equal – true. But maybe being equal is simply not good enough?

Our Philosophy

We’re a dedicated team which strives to provide success to our clients in regards to all their accountancy needs.

Meet our team