Scores of budding entrepreneurs up and down the country pose this question every single day, especially when going solo for the first time. Debt is a worrying issue and can be very serious in certain circumstances, so it’s no surprise business owners need to know where the responsibility lies. The answer to the question is a relatively simple one – the structure of your business will ultimately determine who is liable for the debts it incurs.
No matter whether a limited company is publicly or privately owned, directors are not usually held responsible for business debts. However, this does depend on whether or not any fraudulent activities were pursued and if your company has traded whilst knowingly being in an insolvent position.
Once your company becomes insolvent, as a director you have a duty to act in the best interest of your creditors and demonstrate you are doing everything possible to repay your debts. You must not intentionally take any actions that may cause debts to increase or continue on unpaid. Failure to meet these duties and acting in an unethical manner can not only lead to disqualification from acting as a director in the future; but it may also result in personal liability for some of the company’s losses.
A partnership allows two or more entrepreneurs to trade under their own names or under a business pseudonym. As a partner of a business, typically you are only responsible for the debts that arise during the time period that you act as partner of the business. You may be held responsible for these debts even after you leave, unless there is an alternative agreement in place.
Limited Liability Partnership
This is still a relatively new type of business structure, first introduced back in 2000. An LLP includes some characteristics from both a partnership and a limited company. As long as there is no indication of negligence, the directors’ contributions to business debts are limited to the company’s assets.
There are countless sole traders in the UK from plumbers to painters, brick layers and beyond. As a sole trader you are wholly and legally responsible for all of your business debts. Much like a personal debt, complete liability rests with you and you must repay any outstanding debts – even if your business closes.
A franchise is a completely different type of business that can actually be ran by a sole trader, a partnership or as a limited company. Whether or not you are held personally responsible for business debt as a franchise owner will largely depend on your agreement and how the franchise is organised.
There are no hard and fast rules here as all outcomes will be stipulated in your contracted agreement.
Whatever type of business you are running, the issue of debt is a very important one and it should be addressed before it gets out of control.
If you are not sure what to do, you should seek professional advice. A good advisor will offer a free initial meeting for you to discuss your situation with them. Take advantage of such an offer.