Can my personal debt affect my limited company? This is a good question and one that many business owners ask.

If you want to know more about the relationship between personal debt and different UK business setups, don’t hesitate to read on below.

Limited Company Vs Sole Trader

Before we answer the question ‘can my personal debt affect my limited company?’ there is one thing we need to iron out… 

A limited company and sole trader are two popular ways to set up a business in the UK. A limited company is regarded as a separate legal entity. That is why it is called a limited company, i.e. you have limited liability over it. 

A sole trader is different. If you run a business as a sole trader, the business and yourself are regarded as the same legal entity. 

Can My Personal Debt Affect My Limited Company?

If you are asking this from a financial perspective, the answer is no. A limited company is regarded as a separate legal entity and any debt you personally owe is not connected with your limited company. 

Think of it like this. You are employed by your limited company, usually as a director of the company. The same is true of an employee of McDonald’s. If McDonald’s went bust and into debt, would their employees be responsible for paying the debt? The answer is of course also no.

However, this is not the same as if you were running a business as a sole trader. We’ll get to this shortly. 

Can My Limited Company Debt Affect My Personal Finances?

You might be wondering how it works the other way around. Can your personal finances be affected by debt that your limited company has? The answer to this is predominantly no because again, your personal finances and your limited company are separate entities in the eyes of the law.

Are There Any Exceptions to The Rule?

Those eagle-eyed readers will have noticed that we answered the above question with ‘predominantly no’. That is because there are some very rare situations when your personal debt may be affected by debt that your limited company needs to repay.

This is when credit was given to your company on the basis of you signing a Personal Guarantee. This type of document will make you personally responsible for any debt that the company has in regards to the credit issued.

Can My Personal Debt Affect My Sole Trader Business?

In short, yes it can.

If you have personal debts that you cannot repay, any assets you have in your sole trader business (such as tools or a laptop) could be repossessed as part of other personal belongings to pay off the debt. 

However, having items repossessed to pay off personal debt only happens at a very late stage of debt collection and there are ways to avoid it happening, even if you can’t afford to pay off all your debt at once.

What About Partnerships and Personal Debt?

Personal debt may or may not be the responsibility of your partnership depending on how it is set up. Some partnerships operate like sole trader businesses and are the same entity, whereas others are Limited Liability Partnerships (LLP) and are separate legal entities. 

How to Get out of Personal Debt?

If you are in personal debt, you might have searched the answer if personal debt affects your limited company because you can’t afford to pay your personal debt right now.

You’re by no means alone. Personal debt in the UK is increasing with the average debt currently over £3,000.

But there are debt solutions which you can use to agree on a way to repay the debt over time and avoid any legal challenges (and subsequent visits from bailiffs wanting to repossess your valuables). 

The most popular debt solutions in the UK are:

  • Debt Management Plans
  • Individual Voluntary Arrangements
  • Debt Relief Orders
  • Bankruptcy
  • Trust Deed

Debt Management Plans are an informal solution for people with smaller debts who want to repay over so many months and usually hope to freeze interest on the debt. Services to secure these are offered by debt charities and commercial companies, but you can negotiate them directly yourself.

An Individual Voluntary Arrangement is for people with bigger debts, typically above £15,000, and want a five-year plan with a big chunk of the debt written off. These can only be arranged by insolvency professionals.

Further Support for Personal Debt

If you still don’t know where to turn first to try and get out of personal debt, we recommend speaking with a UK debt charity. There are scores of fantastic ones to choose from, including Step Change UK who can usually arrange Debt Management Plans on your behalf.

What to Do If Bailiffs Try to Collect Personal Debt?

If you have already been to court and had a CCJ issued for your debt, there is a chance that your creditors could chase the debt with bailiffs.

Also known as court enforcement officers, they have the right to repossess items and sell them at an auction to pay off your debt. This is when your sole trader assets become fair game if they want them.

However, you can prevent bailiffs from repossessing any assets in the name of your company. You might have bought a car in the company name or a new computer. Bailiffs cannot take these to pay off the debt.

What If I Need to Get out of Company Debt?

The previously mentioned debt solutions are available for personal debt only. Another range of options is needed to get out of limited company debt. For example, there is an equivalent of an Individual Voluntary Arrangement for companies called a Company Voluntary Arrangement.

You will need to speak with insolvency practitioners to arrange company debt solutions.

Learn More About Getting Out of Debt, Now!

For more information on how to get out of debt in the UK, visit the MoneyNerd blog!

About the author

Scott Nelson

Scott Nelson is a financial services expert, with over 10 years’ experience in the industry, including 6 years in FCA regulated companies. Read more
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