How your business can deal with debt

Sole traders

As a sole trader you are likely to be in business on your own and everything attached or associated with the business carries just your name, this includes bank statements, invoices, letterheads, etc. You are personally liable for all debts associated with the business and in most cases they will be treated identically to personal debts; essentially just because you have a business name it doesn't mean you can separate yourself from your business debts.

Partnerships

In these types of business the partners are jointly responsible for all of the company's business debts. All of the partners can be pursued for outstanding debt and it is not possible to divide it in to partner's shares. The creditors may attempt to recover the debt from one partner and if unsuccessful they will seek to gain the payments from the other partners.

There is no legal requirement for a written partnership agreement, although we personally would recommend it. All that is required is that the names appear on the company notepaper as a partner. If you dissolve the partnership ensure that all creditors are aware that you are no longer responsible for the debts incurred after the partnership is dissolved, keep copies of all letters and ensure that your name no longer appears on the company notepaper.

Personal guarantees or any legal charges that you may have given to the bank as security for your business debts must be organised in such a way that the banks accept that your responsibility for the debt is only valid up to when the partnership was dissolved.

If one of the partners goes bankrupt, the other partners may still be pursued by the remaining creditors for the whole of the debt. What this means effectively is that the partners with the most assets invariably have the most to lose. However, if one of the partners has settled the partnership debt for any of the other partners, then they have the right to sue the other partners for the recovery of their debt.

Limited Companies

Limited companies are separated legally from their directors and shareholders. Companies are deemed insolvent when they cannot pay their debts on time or the value of the assets are less than the amount of its liabilities which includes prospective liabilities and contingent liabilities.

You assets may include your stock and any money that is owed to you for work that is still being carried out and any other items such as fixtures and fittings. Contingent and prospective liabilities will include monies that you may owe in the future.

A duty or care is owed to the company by the directors, employees, shareholders, and (when insolvency is an issue) the creditors.

Directors are not personally liable for the companies' debts, but can be liable for various other things which include:

1. Unpaid income tax where cash drawings have been taken from the company

2. Personal PAYE and National Insurance deductions which may be unpaid

3. Personal guarantees that have been given on behalf of the company, usually to banks or finance companies

4. Any cases of "Wrongful Trading" this usually means companies that have continued to trade whilst insolvent before the company has ceased trading or been put into liquidation

5. Any liability resulting from fraudulent trading

It is therefore vitally important that you remain careful if you are trading and are not sure whether the company is solvent. If you are in any doubt seek professional advice.