Q: When incorporating an existing sole trader business, what happens to any existing loans from the owner of the business? Can they become a director's loan to the newly incorporated company?
Dec 05 2007
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Answered by: Clive Lewis Ask a question
When transferring an existing sole trader business to an incorporated body it is usual for certain assets such as premises, plant and equipment, commercial vehicles and goodwill to be transferred. It is less usual for liabilities to be transferred because they are the liability of the sole trader and cannot legally be transferred without the agreement of the creditor.
This transfer is reflected in the “opening statement of assets and liabilities”. It is usual for the assets to exceed the liabilities. The difference is often credited to the Directors Loan Account (if the sole trader is a director).
It is usually for the sole trader accounts to keep the debtors (customers owing money) and the creditors (the suppliers who are owned money) and assuming the amount in hand after these are cleared is positive the balance can be retained by the sole trader.
If however there are not sufficient debtors left to pay off all the creditors (including your loan account) it will be necessary for you to transfer part or all of the owner’s loans to the incorporated body (as you will be last in line to receive payments from the realisation of the debtors).
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