What happens to a sole traders debt, when incorporated into a limited liability firm?

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Ohnoki94
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Hey,

Assume X is a sole trader. He takes out a £10,000 loan, given he has no limited liability, it is in his name.

X, some time later, incoporates his firm into a limited liability enterprise.

Whom is the liability owed from? Mr. X or the limited liability company which inherited the debt?

And is it possible to transfer the debt like this, in a practical scenario.

Asking on behalf of a friend whom is seeking financial advice, I wasn't so sure.

Thanks in advance.
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AlphaZeta
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QUESTION (Legal form) - Business organisations & their stakeholders BPP

Florence Nightingale runs a successful and growing small business as a sole trader. She wishes to expand the business and has her eyes on Scutari Ltd, a small private limited company in the same line. After the acquisition, she runs the two businesses as if they were one operation making no distinction between them. What is the legal form of the business she is running?

ANSWER

This is quite a tricky question. For example, if suppliers have contracts with Scutari Ltd, the contract is with the company, and Florence is not legally liable for the company's debts. If their contracts are withFlorence, then they are dealing with her personally. Florence has to make a choice.

(a) She can run the entire business as a sole trader, in which case Scutari Ltd's assets must be transferred to her.
(b) She can run her entire business as a limited company, in which case she would contribute the assets of her business as capital to the company.
(c) She can ensure that the two business are legally distinct in their assets, liabilities, income and expenditure.
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Reality Check
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(Original post by Ohnoki94)
Hey,

Assume X is a sole trader. He takes out a £10,000 loan, given he has no limited liability, it is in his name.

X, some time later, incoporates his firm into a limited liability enterprise.

Whom is the liability owed from? Mr. X or the limited liability company which inherited the debt?

And is it possible to transfer the debt like this, in a practical scenario.

Asking on behalf of a friend whom is seeking financial advice, I wasn't so sure.

Thanks in advance.
No, you can't do this. The debtor cannot rid himself of the liability for the debt simply by transferring it to another entity (in this case, the limited company). Debtors never have the right to transfer their rights and obligations (cf. creditors, who regularly sell defaulted debt). The creditor would have to agree to the transfer of the debt, and no creditor is going to do so, for obvious reasons.
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marple
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(Original post by Ohnoki94)
Hey,

Assume X is a sole trader. He takes out a £10,000 loan, given he has no limited liability, it is in his name.

X, some time later, incoporates his firm into a limited liability enterprise.

Whom is the liability owed from? Mr. X or the limited liability company which inherited the debt?

And is it possible to transfer the debt like this, in a practical scenario.

Asking on behalf of a friend whom is seeking financial advice, I wasn't so sure.

Thanks in advance.
The loan was taken out by Mr X and he is responsible for the debt. The new limited company is a separate legal entity and has no responsibility for the loan. This discussion is useful:
https://www.accountingweb.co.uk/any-...ebts-to-ltd-co
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