Are you liable for your business’s debts?

It’s easy to think that business debts are distinct from those which individuals incur but the line between personal and business liabilities is not as clear cut as it may seem.

Personal debt is often reported in the press as consumer debt relating to personal loans, payday loans and credit cards but sometimes business debts can fall to be paid by individuals.

If you are a sole trader or an unincorporated partnership the liabilities of that business ultimately fall on your shoulders. If the business has cash flow issues, underperforms or ends up in formal insolvency, creditors can pursue their debts against the individuals who traded that business. 

As a sole trader the responsibility falls on that individual and in an unincorporated partnership ordinarily the partners will be joint and severally liable for those debts meaning creditors can pursue them all/any of them. 

Directors of limited companies are in a different position and can rely on limited liability status of the company. The debts of the company belong to it and not its directors.  

However, directors may find themselves facing demand for payment of company debts where they have provided personal guarantees to creditors of the company. 

Sometimes business debts can fall to be paid by individuals.

This is also true of director’s loan accounts. An overdrawn director’s loan account is money due from the director personally to the company. If a company enters formal insolvency that account is an asset which a liquidator looks to realise and he/she will call on the director for payment.

The distinction is not always as clear cut as it seems and early advice is key.

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