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Goodwill Not Necessarily a Company Asset

4th July, 2014

The way in which a business is structured has many ramifications and can be especially important on the incorporation of an existing business as a limited company.

A recent case involved a bakery company specialising in the sale of Turkish breads. The business was originally operated as a sole trader by a Mr Ucar, who subsequently incorporated the business as a limited company. The business was sold in 2007, with both Mr Ucar and the company being party to the sale agreement. The goodwill was transferred to the buyer for nearly £500,000.

Only a year after the sale, the selling company went into liquidation and the liquidators sought to recover from Mr Ucar the payment for the goodwill on the ground that it had, in reality, belonged to the company and therefore its payment to him was a transaction at an undervalue and/or amounted to a misappropriation of the company’s assets.

On appeal, the liquidators lost, the court deciding that (despite clear guidance to the contrary by HM Revenue and Customs) the goodwill of a business can be separately owned from the other assets of the business. In this case, it had been held by Mr Ucar despite the incorporation of his sole trader business into a company.

For further information or advice on the appropriate legal structure for your business, please contact Corporate Partner Hugh Strickland at [email protected].

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