Sole trader to Ltd Company with Bounce Back Loan?

SeagullFTB

I was in a partnership for some time. I decided to buy out my partner last year as they wanted to retire. Buying them out exhausted all of our liquid capital, so I had to take out a bounce back loan to provide cash flow. Annoyingly, the bounce back loan had to be in both our names as we were still a partnership at the time. But he was fine with it and we had some proper private contracts drawn up.
Now I'm a sole trader, I will be significantly into 40% tax, so becoming a limited company could be very tax efficient. Especially as I won't need to dividend out all the profit each year. Can I incorporate while I have a bounce back loan? I fully intend to repay the loan in full. I'll be the exact same business, same employees etc... just a different legal entity. Is this okay?
I'm concerned that either HMRC or the BBB will assume I've closed as the the sole trader and partnership elements would've ceased and they'd ask for repayment of the loan immediately.

Jeremy535897

That is something that you will have to ask your bank, but I fear the answer will be no.

warby68

You also need to tread carefully when sounding your bank out.
You do appear to have massaged the BBL system to facilitate a buyout rather than for coronavirus related adverse trading. I know one came before the other in your eyes but the lines were blurred with the continuation of the partnership to secure the BBL.

SeagullFTB

warby68 said:

You also need to tread carefully when sounding your bank out.
You do appear to have massaged the BBL system to facilitate a buyout rather than for coronavirus related adverse trading. I know one came before the other in your eyes but the lines were blurred with the continuation of the partnership to secure the BBL.

Not sure if this makes a difference but just wanted to clarify something. I'm actually buying out the other partner in monthly instalments over many years. But when he left, he had a substantial amount in his capital account that was rightfully his to take according to our partnership agreement. So it was the emptying of his capital account that led to the depletion of liquid funds. Coupled with a drastic reduction in payments from clients during the pandemic, I needed the bounce back loan to provide working capital. My capital in the business remains tied up in non liquid assets.

SeagullFTB

Jeremy535897 said:

That is something that you will have to ask your bank, but I fear the answer will be no.

But surely that will prevent many businesses from incorporating for 6 to 10 years. Seems a tad unfair. If it's in the best interest for the business and ensures long term survival and loan repayment, that must be a good thing.

CKhalvashi

SeagullFTB said:

Jeremy535897 said:

That is something that you will have to ask your bank, but I fear the answer will be no.

But surely that will prevent many businesses from incorporating for 6 to 10 years. Seems a tad unfair. If it's in the best interest for the business and ensures long term survival and loan repayment, that must be a good thing.

I don't think that will be the case for this exact reason.

We haven't availed of government funding, however will be coming out of this pandemic structurally very different to how we went into it, partially as a result of Brexit (this part was planned already) and partially due to the pandemic. I can imagine that many businesses are in the same position to ensure their long term viability.

I will check the full rules in a while, however as long as there hasn't been a change of trading name, I fail to see how there's a change of business on a common sense point of view, even if the rules possibly aren't structured in this way.

newdriver101

SeagullFTB said:

Jeremy535897 said:

That is something that you will have to ask your bank, but I fear the answer will be no.

But surely that will prevent many businesses from incorporating for 6 to 10 years. Seems a tad unfair. If it's in the best interest for the business and ensures long term survival and loan repayment, that must be a good thing.

@SeagullFTB- it’s not quite as simple as that - yes I suspect many individuals will be prevented from incorporating if they took out BBL. 
As a sole trader the bank can come after your personal assets if you default.  In the case of the BBL the government has said sole traders do not have to give personal guarantees + the bank cannot take your house or car if you default (which they would they be able to do with a “normal” loan). 

If you fail to pay back the BBL as a sole trader - although the bank cannot come after your house or car - the bank can technically come after your OTHER personal assets to claim their money.  Your house is safe for the BBL but you may have other personal assets of value that the bank could claim if you default...

You would need to ask your bank for permission as you are transferring the risk from one type of entity to another (even though you own both). Sole partnership + business are treated differently if there is a default.  The bank would therefore have to determine whether you have a viable business and you’re not going to just liquidate the company once the BBL is transferred...

Jeremy535897

The fundamental problem is that an individual debt cannot be transferred to a limited company. What happens is that the first debt is repaid and a new debt is taken out. This gives rise to the following problems:

• the purpose of the new BBL would be to repay the existing BBL, which is not a qualifying purpose
• the new BBL would inevitably miss the 31 March deadline

SeagullFTB

newdriver101 said:

SeagullFTB said:

Jeremy535897 said:

That is something that you will have to ask your bank, but I fear the answer will be no.

But surely that will prevent many businesses from incorporating for 6 to 10 years. Seems a tad unfair. If it's in the best interest for the business and ensures long term survival and loan repayment, that must be a good thing.

@SeagullFTB- it’s not quite as simple as that - yes I suspect many individuals will be prevented from incorporating if they took out BBL. 
As a sole trader the bank can come after your personal assets if you default.  In the case of the BBL the government has said sole traders do not have to give personal guarantees + the bank cannot take your house or car if you default (which they would they be able to do with a “normal” loan). 

If you fail to pay back the BBL as a sole trader - although the bank cannot come after your house or car - the bank can technically come after your OTHER personal assets to claim their money.  Your house is safe for the BBL but you may have other personal assets of value that the bank could claim if you default...

You would need to ask your bank for permission as you are transferring the risk from one type of entity to another (even though you own both). Sole partnership + business are treated differently if there is a default.  The bank would therefore have to determine whether you have a viable business and you’re not going to just liquidate the company once the BBL is transferred...

I understand. But what if I don't care about transferring liability of the loan to the limited company? What if I simply keep the loan in my personal name and remain personally liable, but cease trading as a sole trader and continue as a limited company?
Alternatively, could I continue trading as a partnership with my own limited company being the second partner? The limited company would be owned 50/50 between me and my wife. 

newdriver101

You would need to speak to the bank (+ your accountant) - not sure if you can simply cease trading as a sole trader if you have an existing debt in place.  I suspect you will have to maintain the sole trader business just to pay back the debt and set up a brand new limited company...

CKhalvashi

newdriver101 said:

You would need to speak to the bank (+ your accountant) - not sure if you can simply cease trading as a sole trader if you have an existing debt in place.  I suspect you will have to maintain the sole trader business just to pay back the debt and set up a brand new limited company...

Surely incorporation would make it exactly what it is already though in law, which is a personal debt.

This would presumably be dealt with as part of any asset sale to the Ltd anyway, which is in any event (subject to everything being at a fair market value) good tax planning in addition.