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Sole Trader | Partnership | Limited Companies |
About Your Business
At Business Debtline we have noticed people are sometimes confused about what it means to be a sole trader, partnership or limited company.
The type of company you run will be important if your business runs into debt. It is therefore important to understand the type of company you run. These brief notes are designed to help you, but please phone us if you need further advice.
Sole Traders
Sole Traderships (175KB)
This is where it is just you in business on your own. Your business bills, business bank account statements, invoices, letterheads and other business correspondence have just your name on them.
You are personally liable for all business debts, which are legally treated no differently from your personal debts. Just because you trade with a business name, doesn’t mean to say that you can separate yourself from your business debts.
Phone us if you need further information.
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Partnerships
Partnership (160KB)
Partners are jointly and severally liable for all business debts. This means that all partners can be pursued for the total debt; it is not possible to divide it into partners’ shares.
If creditors cannot obtain payment of a debt from one partner, they will seek payment in full from the others. However, for income tax purposes, partners are taxable only on their share of the business profits.
There is no legal requirement for a written partnership agreement, though you may consider it desirable to have one. Otherwise, all that is required is that your name appears on the business notepaper as a partner.
So, if you do dissolve the partnership, make sure that all of the existing creditors know that you will not be responsible for debts incurred after the partnership is dissolved and that your name no longer appears on business notepaper. Keep copies of the letters.
If you have given a personal guarantee or a legal charge to a bank as security for the business debts, make sure that the bank accepts you are only responsible for any debt incurred before the partnership is dissolved.
If one partner goes bankrupt, although the debt will be written off for that partner, creditors can still pursue the remaining partners (or former partners) for the whole debt. In effect, what this means is that partners with the most assets have the most to lose.
If one partner has had to pay a partnership debt that partner has the right to sue other partners for their share of the debts.
Phone us if you need further information.
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Limited Companies
Dealing with Debts of a Limited Company (157KB)
A limited company is a separate legal entity from its directors and shareholders.
A company is deemed to be insolvent when it is unable to pay its debts either as they fall due or where the value of its assets is less than the amounts of its liabilities, including contingent and prospective liabilities.
Assets will include your stock, fixtures and fittings and could include money that you are owed or work you have in hand. In addition, contingent and prospective liabilities include money you will owe in the future.
Directors owe a duty of care to the company, its shareholders, employees and, where there is doubt as to its insolvency, also to creditors.
Generally a director (or someone acting as a director) is not personally liable for the company’s debts. However you can be personally liable for the following:
- your own personal PAYE and National Insurance (NI) deductions which are unpaid;
- any unpaid income tax arising where you have taken cash drawings from the company;
- any personal guarantees given on behalf of the company, most commonly to banks, finance companies, landlords and occasionally major trade creditors;
- any liability arising as a result of trading while insolvent prior to the company ceasing trading and/or being put into liquidation. This is known as ‘wrongful trading’;
- any liability where you have benefited from a transaction at an undervalue and/or preference;
- any liability resulting from fraudulent trading.
You will therefore need to be very careful when you are trading if you aren't sure whether the company is solvent. If you are in any doubt about this, phone us for advice.
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