Being Limited or self-employed can make all the difference when it comes to debt recovery

A common area of confusion for small businesses and the self-employed is the difference between Limited company and sole trader status, particularly the legal implications from a debt recovery perspective which can come as a surprise for those not in the know.

First of all, it is crucial that you find this out for your business if you don’t already know – you’d be surprised how many small business directors don’t know this. The major difference to consider from a debt point of view is that if your business is a registered Limited company, then your personal assets are protected against the company. This gives the peace of mind that, should the business get into financial difficulty, your house, etc, is safeguarded.

However, if you run your business as a sole trader then things are different. This means you are personally responsible for the debts and costs incurred by the business. Therefore, if you fall behind on business bills a creditor is legally entitled to look into the option of seizing your personal assets to reclaim the equivalent sum of the money owed to that in the outstanding invoice.

It is worth considering this in greater detail. If for instance, you are a creditor wanting to chase a sole trader company for payment, but this company has now ceased to exist, this does not mean you can’t still look to successfully claim money owed. To re-iterate, this is because the debt rests with the individual and not the company and so can be pursued irrespective of whether the business is still trading. For old debts (less than six years) it is certainly not worth writing them off as there are ways and means to recover.

On the other side of the coin, if a Limited company goes into debt the directors are entitled to walk away from any debt and are not held personally accountable. However, if this Limited company is liquidated then the directors could be asked to cover the cost of this which can range from £5,000 – £15,000. So if you are a Limited company director, there are stills costs to pay if your company goes bust.

We recommend that if you are a sole trader you consider looking into becoming a Limited company. There are pros and cons which will be particular to the type and size of business you have, but from a debt perspective it offers a good level of protection.

Article by Debt Guard

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