Although it is simpler to set up and arguably operate a business as a sole trader (from a paperwork perspective at least), the sole trader will be responsible for all debts and liabilities of the business, since the business and the individual are legally inseparable as far as assets and liabilities go. That means, if the business fails, the individual may be risking personal assets and their personal cash too! This is because the individual trades as, say Joes Café for instance and hence they are one in the same thing.
When it comes to buying, or selling a business that is operating as a sole trader, the process is relatively straight…
When it comes to buying, or selling a business that is operating as a sole trader, the process is relatively straight forward in most cases. A simple sale purchase agreement that can be drafted by a solicitor or even downloaded online (not recommended), will probably suffice to transfer the business.
Problems may arise with the likes of contractors, where a lease is in place or where the business requires some form of trade licence, as the licence, contracts and lease will need to be transferred from seller to buyer. Why is that an issue? Sometimes, the issuer of the licence, the customer or supplier who has a contract with the business or the landlord in the case of a lease; subject to any agreed specific terms, may refuse such a transfer. This could leave buyer and seller in a sticky position.
Whilst sole traders are required to keep a record of income and expenditure, there are no legal requirement for them to produce and maintain trading accounts…
So, the things to watch out for when buying or selling a business set up as a sole trader are things like the contracts with suppliers, any licences the business holds and customer contracts as appropriate. Make sure they can be assigned to the buyer or form a limited company moving everything across as necessary either before or after purchase (take advice if doing this). Buyers and Sellers should speak to professional advisors to ascertain the correct advice for their given situation.
Whilst sole traders are required to keep a record of income and expenditure, there are no legal requirement for them to produce and maintain trading accounts. If a sole trader is considering the sale of their business, this is highly recommended if not essential. From a buyer’s perspective, they will want to see a breakdown of income and expenditure and trading accounts are the best way to document this for buying and selling a business, supported with tax and VAT returns which will affirm some of the stated figures.
The sellers tax liability when selling as a sole trader is primarily Capital Gains at the current rate, less any personal allowance that may be in place at the time of sale. This can vary of course with changes in government budget and should be checked on the www.gov.uk website, or ask an accountant.
The final point is on staff. All employment is protected in the UK by TUPE (Transfer of Undertakings (Protection of Employment) Regulations 1981). In short, and without going in to the fine detail, employees are expected to transfer to the new owner, i.e. the buyer of the business on the same terms and conditions. Exceptions to this could be redundancy or the business trading insolvent. In those circumstances, it is important to be clear about the costs involved in making redundancies for example and whether the buyer is going to pay those costs or indeed whether the seller is expected to foot the bill through the price paid for the business.
The sellers tax liability when selling as a sole trader is primarily Capital Gains at the current rate…
This is by no means a conclusive guide as to the buying or selling of a business, but it outlines some of the key points.