Partnership ending but trade continuing

[jenschof1]

I am doing the bookkeeping as a favour for my neighbour's son, who set up a car repair shop with another mechanic in October 09. The other partner walked out of the partnership last week. Note it is an ordinary 50:50 partnership and not an LLP. The partner leaving wants to be bought out (I think he is hoping for his capital to be returned) and is willing to leave all other assets in the business, but also wants to walk away from the liabilities. The remaining partner wishes to continue trading under the same name, as a sole trader. Both partners are currently named on a 5 year lease (break clause after 3 years) for the business premises.

I do not have any previous experience of partnerships, other than exams done way back. The books are currently set up on SAGE. Can anyone advise what needs to be done from an accounts/bookkeeping point of view? Do we have to set up a completely new business on SAGE, or can we carry on with the present accounts and then apportion profits for the tax return - Partnership return to 28th Feb, and sole trader business from then on.

If the amount finally agreed to buy out the partner is less than the capital put in how do we account for that. Note I anticipate the business will have made a slight loss to date (last month being the first month of profit). As it is so new, I wouldn't think there is any goodwill.

I have advised the remaining partner to seek the advice of a solicitor, as no partnership was originally set up. I would also prefer them to consult a firm of accountants to help with the accounting side. As money is tight, they seem reluctant to do this at the moment and I feel I am being relied upon to sort it out, which is giving me sleepless nights!

Am I over complicating this??

Also, if anyone can advise, how a reasonable buy out figure might be arrived at, I would be extremely grateful.

Many thanks

[elainec100@cheapaccounting]

You are right - given the lease agreement involved this needs to be sorted with a final ptn statement drawn up plus legals to sort of assets . liabilities at close.

It is far from just a Sage issue.

I would strongly advise you to say you cannot do this and insist that they follow the good advice you have given them.

[Jaykay]

Favours are always the worst!

Yes, they will need to see an accountant to sort out the figures between them. As a last resort, a solicitor but that tends to be expensive.

The accounts need to be finalised for the partnership and then everything starting again for the sole trader. The Inland Revenue will tell you that you can carry straight on, do the accounts for a year then apportion the profit. This works nicely on their examples but is horrible in real life.

The partnership will make a profit/loss for the period of trading which is split 50/50 between the partners. Added to each is the amount introduced less the drawings taken by each. That gives you a value each partner has in the ceasing business. Presumably the remaining partner wishes to take the assets and the creditors will have to agree to them being passed over to the continuing partner.

The lease is a problem. The partners cannot agree to take the departing partner off the lease, only the landlord can do that. Either a new lease is set up or the leaving partner has to agree to stay on the lease for the remaining term.

Hope it works out OK for all 3 of you.

[elainec100@cheapaccounting]

IMO a solicitor is needed to assign the lease

[jenschof1]

Dear Jaykay

Thanks for your reply. You mentioned that HMRC allow you to apportion the profits, but this is horrible in real life. What do you mean by 'horrible'?

Also do you know when the partnership actually ends? Is it when the leaving partner walked away (28/02) or is it when he is finally paid off. We are assuming it ended 28/02, but until it all gets agreed, the business still needs to go on. What do I do with the bookkeeping from 1st March? The bank have agreed that the bank account can stay open and the leaving partner can now no longer make payments, etc. I think his name has to stay on the lease, but I think his solicitor has asked for confirmation that he will not have to pay any penalties should the continuing partner default on the lease, cease trading etc.

I think most other suppliers are happy for the remaining partner to take over the debts, some accounts eg gas/electric/rates etc were set up in the leaving partners name, so they need him to sort that out.

All in all, it's a big headache for all concerned. We are going to see a solicitor later in the week. My only concern is that he may not know what to do on the accounts side of things!

Thanks for your help so far!

[Ray_Stewart]

These partners must consult an accountant and a solicitor so that each person knows how the breakup is being managed, exactly how the final settlement is calculated and that each of them is protected from the other in the future.

Problems can blow up later if either partner feels aggrieved by the way the break up was handled, the partner left may feel he paid too much or the leaving partner may try and get more money later if the business turns profitable in a year or so - yes it can happen.

I don't understand why people try and manage these things on their own on a shoestring unfairly relying on a friend to bail them out.

There is no alternative but to manage this properly and seek the professional help whilst the two partners are still talking. Yes it will cost some money but it will be a heck of a lot cheaper in the long run than the above mentioned scenarios if they kick off.

As far as the books are concerned it is better all round to have the partnership as a seperate set of books. You can use the same bank account as you have arranged but it jumps from one set of books to the other at a set and agreed date.

[IanBrewster]

You can use the same bank account as you have arranged but it jumps from one set of books to the other at a set and agreed date.

I am in the process of disolving a partnership and carrying on the business as a sole trader. I was told that I would have to open a new bank account for the sole trader business - there was no way to 'convert' the existing partnership a/c. That may just be NatWest, but I would check.

[Ray_Stewart]

The bank have agreed that the bank account can stay open and the leaving partner can now no longer make payments, etc.

This is already agreed Ian so it must be Nat West that is awkward. They all have different policies and views on this.

[Ray Coman]

Note that the leaving partner may be liable to a capital gains tax charge, if either there has been a revaluation in the accounts, say to bring in the value of any goodwill, or if he makes up payment for giving up his partnership share.

I realise that you are not responsible for the leaving partner at this stage, but a revaluation could increase the cost for CGT purposes, say if a new partner joins.

[jenschof1]

Hi Raphael

Thanks for your input. Do you think there would be any goodwill in the business, given it has only been trading for 5 months? The fixed assets are only a few months old and I anticipate the business will have made a small loss overall for the period. The leaving partner is asking the remaining partner to buy him out, but only wants around 5.2k - he originally put in around £5.6k but has drawn around £1.2k.

Do we really need to revalue the assets?

Thanks for your help so far.

[Ray Coman]

Hi Raphael

Thanks for your input. Do you think there would be any goodwill in the business, given it has only been trading for 5 months? The fixed assets are only a few months old and I anticipate the business will have made a small loss overall for the period. The leaving partner is asking the remaining partner to buy him out, but only wants around 5.2k - he originally put in around £5.6k but has drawn around £1.2k.

Do we really need to revalue the assets?

Thanks for your help so far.

You do not have to revalue the assets. The leaving partner would not be required to report a disposal where the his total gains for 2009-10 are less than £10,100, and proceeds are less than £40,400, although a capital loss should be included on the Tax Return.

I hope this helps