Funding a new business with existing business money

J

johnfrancis

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Hello,

I'm hoping to get some advise.

I set up a limited company 2 years ago and things have gone quite well.

I am considering starting up a completely different company which will be focused on ecommerce and online sales in a different area. I am thinking this is a business which could potentially be sold off after a number of years. A VAT number would be required.

Would it be possible to fund the new startup costs with accountants etc and some stock purchase with profits from the existing company. Could it be a loan ?

Thanks in advance.
 
You really need to sit down with a good accountant and tax advisor and tease all these issues out to find the best structure.

By all means, get some ideas on askaboutmoney but validate them with your professional advisors.
 
The first question to ask is how you are managing the cash from the existing company.

Are you letting it pile up or are you taking it out? If you don't need it, you should probably be taking it out to avoid double taxation.

Now, if you have that cash in your own pocket, you can use it to set up the new company.
 
I am not a tax expert...

But you probably could set up the new company as a subsidiary of the existing company to minimise risk.

Losses in the new company could probably be offset against the profits of the existing company.

If it's successful, you can sell it off, but the problem is that the money and profit from selling it would be stuck in the company.
 
I have to say that I like keeping things simple.
They are separate companies? Keep them separate.
Take the profits out of the existing company and use them to fund the new company.
If it's successful and you sell it on, the gain on selling will be in your name and you may be able to avail of Entrepreneurial Relief.

If it's unsuccessful and you close it down, you can use the losses for CGT purposes against later capital gains.
 
Definitely as already suggested seek professional advice - you could set up second business as a subsidiary, or set up both companies in a Group - in either case Co A would be able loan Co. B start up funds
 
Brendan Burgess said:
The first question to ask is how you are managing the cash from the existing company.

Are you letting it pile up or are you taking it out? If you don't need it, you should probably be taking it out to avoid double taxation.

Now, if you have that cash in your own pocket, you can use it to set up the new company.
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Yes the cash has built up in the company bank account, i will hopefully need it for expansion or cashflow as the company grows.

My financial year end is comping up soon and i was thinking this could be a good way to keep the corporation tax bill to a minimum and also have the company set up.
 
Brendan Burgess said:
I have to say that I like keeping things simple.
They are separate companies? Keep them separate.
Take the profits out of the existing company and use them to fund the new company.
If it's successful and you sell it on, the gain on selling will be in your name and you may be able to avail of Entrepreneurial Relief.

If it's unsuccessful and you close it down, you can use the losses for CGT purposes against later capital gains.
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Thanks for the reply, i think i like the idea of keeping things simple also.

I will get do as you have all suggested and seek some professional advice also.

Many thanks.
 
Bank Manager said:
Definitely as already suggested seek professional advice - you could set up second business as a subsidiary, or set up both companies in a Group - in either case Co A would be able loan Co. B start up funds
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Hi Bank Manager,

Thanks for the reply, would this group be like a holding company ?
 
johnfrancis said:
Hi Bank Manager,

Thanks for the reply, would this group be like a holding company ?
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yes that would be one option, as would say Co A holding the shares of Co B, or having a Golden Share arrangement between the companies - you need professional advice if looking at these options...
 
Brendan Burgess said:
You really need to sit down with a good accountant and tax advisor and tease all these issues out to find the best structure.
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This. A thousand times this.

It seems to me that the simplest way to do this is for existing, profitable company to make a loan out of its retained profits to new company to provide the working capital that new company needs. The loan is not tax-deductible to the lender, nor taxable in the hands of the borrower. As OP controls both companies they can manage interest, repayment of the loan, etc flexibly, in a way that can address changes in circumstances over time.

The simplest thing is not necessarily the most tax-efficient thing, but my instinct would be keep it simple and don't faff around with group structures and subsidiaries and the like unless the previously-mentioned good accountant and tax advisor can show the advantages that accrue from this.
 
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TomEdison said:
It seems to me that the simplest way to do this is for existing, profitable company to make a loan out of its retained profits to new company to provide the working capital that new company needs.
....
my instinct would be keep it simple and don't faff around with group structures and subsidiaries and the like
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Excuse my innocence but in the absence of a group structure, how is your suggestion remotely legal?
 
I'm missing something, obviously, but if A Ltd has surplus funds that it does not immediately require for its business, can it not lend them to whoever it wishes?

A sole trader could do this; why not a limited company?
 
Absolutely not, it's been illegal except in rare and tightly limited circumstances, generally involving formalised group relationships, since the enactment of the Companies Act 1990.
 
Couldn't the company do this making use of the summary approval procedure?

(More generally: See, this illustrates exactly why the OP needs to talk to a good accountant and tax advisor.)
 
As I see it:

If the two companies were completely unconnected, there wouldn't be a fundamental problem with a loan from one to another, subject to the usual requirements — the loan must be a proper transaction for the lending company to enter into; mustn't threaten the solvency of the lending company; mustn't be a disguised attempt to assist in the purchase of shares in the lending company, etc.

The problem arises because the two companies aren't unrelated — they are both owned or controlled by the same person (the OP). This means that the loan is forbidden unless it is approved under the summary approval procedure — directors of the lending company make a statutory declaration of solvency; at least 75% of shareholders in the lending approve the loan in a special resolution. Assuming the OP effectively controls the lending company and 755 of its shares, this looks acheivable.

If I understand him rightly, Tom suggests . . .
T McGibney said:
Frying pan. Fire.
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. . . that this will just expose the lending company to a different problem/different set of problems. Off-hand, I'm not seeing what that problem/set of problems is, but this doens't mean that Tom is wrong; he has more experience of this than I do so, if you are going to bet on one of us being off-beam here, bet that I am.

Which underlines Brendan's original point; you can't over-emphasis the importance of getting proper, knowledgeable, competent advice about a transaction like this.
 
The problem with you idea is that it sends the OP down the road of exposing him/herself to personal liability for the debts of a company that is only in existence for 2 years.

I agree that the OP badly needs strong professional support, and not only in relation to this idea.
 
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