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Are you personally liable for your business’s debt?

By Richard Olsen

For a business owner, your company’s ongoing success and survival may seem like your number one priority. It’s easy for your private life to become intertwined with your professional one – and this includes your finances.

When you and your business are closely weaved, knowing the boundary between your wealth and your company accounts is crucial if you want to safeguard yourself and maintain a distinction. That’s why it’s essential to know when you are liable for your business debt and what you can do to protect it.

There are some circumstances in which you are liable for any debt incurred by your venture. If you use personal credits or home equity loans to increase the capital in your business and secure funding, you will automatically be responsible for the debt associated with those loans.

Similarly, if you operate as a sole trader, you have unlimited liability. If you run into debt through mismanaged finances or other issues, it will once again be your responsibility to address the issue.

Another issue is the channeling of personal money to plug a funding gap in a company. While it’s common for entrepreneurs to place their own money into a business – especially in the early stages when funding is scarce – having to do this regularly is not the sign of a thriving business. It will also be detrimental to your private life, potentially leaving you in personal debt alongside any business problems.

Nobody wants to end up in debt – whether it’s business-related or otherwise. Fortunately, there are steps you can take to protect yourself and reduce the level of liability. We list some of the most effective below.

  • Have the right business structure. While sole traders are responsible for all the liabilities related to their business, there are alternative structures that will reduce your liability. This includes a partnership, where liability is shared with your partners but still unlimited, a limited liability partnership or a limited company.

Both a limited company and LLP require your company to be registered with Companies House, making it a distinct and separate legal entity that reduces your liability. It does require additional paperwork, which you must be prepared to undertake.

  • Buy personal guarantee insurance. A personal guarantee is often used as security for a loan, where the guarantor promises to clear the balance if the company fails to do so. If you sign a guarantee for finance, it’s essential to get protection so that, if the debt does fall to you, you aren’t left with a hefty bill.

Personal guarantee insurance offers cover from 60% of the loan amount for unsecured, rising to 80% in year three onwards, and 80% from year one for secured loans. This means that if you are called upon to pay the debt, you won’t need to cover the total amount.

  • Maintain stability. The best way to reduce the chances of being left with debt is to stabilise your finances. This means placing your business in as strong a position as possible, with careful planning and forecasting. If you spot an issue, it’s vital to act ahead of time before it culminates in debt – to the benefit of you and your company.
  • Keep separate accounts. Keep your personal finances separate from your business. This will allow you to focus on optimising your company finances with a clear understanding of your income and outgoings, so you can get insight into how healthy your accounts are. It enables you to know what money is yours and what money belongs to your business, so there’s no confusion between the two.
  • Use external support where appropriate. There are many options on the market to support your business. These include short-term cash flow solutions, loans and investment.

By understanding the products on the market, you can avoid debt and strengthen your finances.

If you are unsure how to handle the issue of liability for your business and avoid the problem of debt, the first step is seeking expert advice.

UK Business Advisors can take you through the option and allow you to create circumstances you feel entirely comfortable with.

Richard Olsen | UK Business Advisors (ukba.co.uk)

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