Merging of companies and existing debts

I and a friend wish to join forces and create a company "C". At present we work for company "A" and "B" which we own separately.

We are both working to reduce the debts within companies A and B but it is likely I'll be in the position where mine will take longer to pay off.

A logical way forward seems where company C is owned jointly by company A and B. Then dividends created by company C can be used to pay off debts in companies A and B. I assume dividends disbursed in this way from one company to another don't attract corporation tax or do they. I hate to be taxed twice.

When the debt in say my company A is paid off, can company A be closed, or allowed to be dormant, where the 50% of shares of company C can pass directly to me?

I assume this must be a regular occurrence in the real world where two join forces with the need to pay existing company debts off.

I would be grateful for any help.

Reply to
Fred
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Why mess around? What's wrong with the individual shareholders of the new company using their dividends to pay off the debts of the other companies?

Reply to
Peter Saxton

Because the debts will then written off with no tax advantage. These are debts and not share capital and hence attract no tax relief.

Should share capital be put into the company to pay off these debts?

If companies A and B continued trading then the debts could be paid in preference to dividend and hence no corporation tax paid on these "profits". The route you're suggesting will result on corporation tax on these dividends.

Am I going wrong here and missing the point?

Reply to
Fred

Writing debts off that are owed never gets you tax relief! Share capital doesn't get tax relief.

Why don't the shareholders lend the company the money?

A company doesn't pay corporation tax on dividends received.

Reply to
Peter Saxton

It does if the shares become of neglibile value. They can either be offset against a capital gain or against income.

The shareholders have but want to get it out in the most efficient way. They don't want to take a dividend which is taxed.

I assume you're suggesting that company C is owned by companies A and B. For the (untaxed) dividend of company C to pass to company A and B. This would be useful since company A and B have different leveles of indebtedness.

Reply to
Fred

How much money are we talking about?

A loan isn't taxed.

That was your suggestion to begin with. I would have not bothered unless there is some material economic advantage.

Reply to
Peter Saxton

I know but money taken out as dividend is.

I really do appreciate your help. I don't want to criticise you in any way but I find it difficult to follow what you're trying to suggest as being the best way forward. We are talking of around 10,000 on my part. Naturally I would like to get this 10k back without paying any more tax than I have to.

The setup of 3 companies seems expensive from an accounting point of view, though being small companies wouldn't need audited accounts. Hence the question of whether it is feasible of later assigning shares from Company A and B direct to persons (shareholders) A and B.

Many thanks for your help.

Reply to
Fred

But if loans have been put in, they don't have to be taken out as dividend, simply as loan repayment.

Reply to
Ronald Raygun

Why take it out as dividend if you lend the money to the company? Just repay the loan.

Try doing the calculations and see how much tax is paid under the two scenarios. Don't pay dividends when you can repay loans though.

It should be possible to do a simple set of calculations on a spreadsheet and see whether it is worth the hassle.

Reply to
Peter Saxton

Absolutely. Sorry if I haven't explained this well. The only way the loan can be repaid is through continued trading. Hence it is essential Comapanies A and B are seen to continue trading and making profit to pay off the loans. I was trying to find the best mechanism for the loans to repaid when we swtich to trading through company C. Comapny C will eventually be owned by people A and B.

Reply to
Fred

Yes but they can't be repaid if the money is not there. Companies A and B must therefore trade and make profit to pay back the loans. What I'm asking is the best mechanism for this to take place given that any new trading will be in company C?

Reply to
Fred

Ah, I see. How about this, then:

Suppose you are A Esq and you own all the shares in A Ltd, and A Ltd owes you personally £X. Suppose C Ltd has been created but has as yet no significant working capital.

What you want is to have C Ltd buy the assets of A Ltd, which include goodwill worth what A Ltd owes A Esq.

So, you lend C Ltd £X. This need not be real money, but so long as all the parties involved are in agreement, you can use "Monopoly Money". This is not a joke. In effect what you're doing is using A Ltd's debt to you as an asset (which *to you* is what it is), but monopoly money is a simple way of illustrating what's going on:

You lend C Ltd £X by giving them it in funny money.

C Ltd uses this loaned pretend cash to buy the assets of A Ltd.

A Ltd is now solvent and can repay its debt to you.

You are happy to accept this funny money and extinguish A Ltd's indebtedness to you, so that A Ltd can now be wound up debt-free.

The funny money is back where it came from, and was only used as a placeholder for real money (which in principle you could have borrowed from a bank, and given it back to them once it had been through the hands of C Ltd and A Ltd), except that you've saved yourself the hassle and expense of using a real bank loan.

The effect achieved is exactly what you want, namely that it is now C Ltd instead of A Ltd which owes you the £X, and A Ltd can rest in peace.

Repeat the same exercise for B Esq and B Ltd and £Y if necessary.

Reply to
Ronald Raygun

Doesnt it all get sorted out anyway if you continue trading? Are we talking a maximum of £10,000 @ 19%? I could never bring myself to do all this for £1,900 even if I am wrong!

Reply to
Peter Saxton

Perhaps 1,900 is worth more to me than to you. It represents a modest amount of work. Not something I can get for a day or two's work.

The idea is to stop trading and merge to form a new company.

Reply to
Fred

Are you able to set out the accounting in a spreadsheet to show how you will save the money? I'm not convinced yet.

It shouldn't be difficult to set up. Have the companies along the top and time and descriptions down the left side. Transactions that flow from one company to the other are on the same row.

Reply to
Peter Saxton

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