Understanding the distinction between personal debt and business debt can be challenging for business owners. When a business faces financial difficulties that might lead to closure, it’s crucial to grasp the implications for personal assets. Here, we clarify these distinctions to alleviate some of the stress associated with such situations.
The extent of liability for debt depends on the type of business. A limited company is considered a separate legal entity, and its debts are its own responsibility. Owners benefit from limited liability, safeguarding their personal assets. However, exceptions exist when owners provide personal guarantees as collateral for loans. In such cases, personal assets may be at risk if the company undergoes liquidation.
Sole traders, who operate without the protection of limited liability, are personally liable for their business debts. In challenging times, they may use personal funds or credit cards to support their businesses. If they cannot recover these debts through business operations and fall into financial distress, they risk losing personal assets like homes and vehicles.
When it comes to dealing with debt, individuals and businesses have distinct options to consider, aside from improving their cash flow. Two formal repayment plans can assist in managing and eventually eliminating debts.
Addressing Business Debt:
For businesses grappling with debt, a Company Voluntary Arrangement (CVA) offers a structured solution. This formal repayment plan consolidates unsecured debt, allowing it to be repaid through manageable monthly instalments. Typically, the CVA spans five years, after which any remaining unsecured debts are discharged. The CVA enables the business to continue operating while preventing further actions from creditors, such as County Court Judgements.
Dealing with Personal Debt:
Sole traders encountering financial difficulties have a similar formal repayment option known as an Individual Voluntary Agreement (IVA). Functioning akin to a CVA, an IVA enables individuals to systematically repay their debts over a specified period. Crucially, it provides an alternative to bankruptcy and offers the opportunity to retain personal assets, such as a residence.
Whether you operate as an individual or a limited company, solutions are available when facing debt. These formal repayment plans empower individuals and businesses to sustain their operations while gradually settling unsecured debts. However, formal repayment plans may not always be the most suitable choice for businesses, prompting the consideration of closing the company and starting anew when financial challenges are insurmountable.