A common question for business owners is whether they are personally liable for the debts of their business.
The answer depends on the structure of your business and the way it was formed.
When you may be personally liable
Examples of when you may be personally liable include:
- Using your property as collateral: If you, for example, used your house to secure a business bank loan, this will be at risk if your re-payments default or you get into debt.
- Funding business through credit cards or personal loans: This means that you will be personally liable to keep up with the payments and any debts that occur because they are tied to your personal finances.
- Signing a personal guarantee: A personal guarantee is a declaration that you will repay a debt if the business can’t. Banks frequently ask business owners to sign these in order to protect the bank’s position should the business fail.
- Signing business contracts under your name: If purchase agreements and service contracts for your business are signed under your name rather than the business name, it means that you will be personally liable for any debts relating to those contracts.
- Fraud or errors in record keeping: Any discrepancies in your books could mean that you become personally liable for any debts. Similarly, if you lied or misrepresented yourself or any information when obtaining business loans, the debt could be carried over to you personally.
- Sole Proprietorship: Limited liability does not apply to sole proprietorship which means that creditors (i.e. the people that are owed money) can go after personal assets to recoup their losses. You are most likely a sole proprietor if you have not incorporated or set up a specific form of business entity for your company.
We strongly recommend that you speak to your Accountant to see if you should be set up as a limited company.
What to do if you are personally liable for business debts?
If you are personally liable for your business debts, and you can’t repay them, it may mean that you need to file for bankruptcy.
There are a number of drawbacks to filing for bankruptcy that can have a significant effect on your life, including:
- The possibility of losing your home and other large assets or luxury items
- You could lose your job
- Your credit rating is affected for 6 years.
What if you are not personally liable for your business debts?
You could opt to do a Creditors’ Voluntary Liquidation (CVL) which allows you to close down your business and put it into liquidation because it is insolvent.
You can make a fresh start, knowing that you have acted in a completely legal and appropriate way. A CVL is the most common way for directors or shareholders to tackle the problem of their company’s debt struggles.
There are other options that you could take, such as a pre-pack administration.
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