We know credit scores can affect our personal lives in terms of taking out loans, but how does debt affect your limited company? In this article, we’ll tackle this question, as well as provide tips on how to reduce personal debt. 

They say that you should never mix business with pleasure, but the lines can become blurred when you own your own company. There are some instances whereby your personal circumstances can affect the business that you own. 

For example, when it comes to personal debt, it’s really important to understand how it could affect your business. Sometimes, it’s not viewed as separate to your business accounts.

Whilst you can arrange to reduce personal debt through individual voluntary arrangements, is it wise to and what are the affects? Let’s delve into this in more detail…

What is a Limited Company?

A limited company is one of the most popular business models due to the fact that it is designed to limit personal liability for owners and investors. With the limited company model, investors or subscribers are only liable for the amount of money that they have invested in or guaranteed to the company. 

In the case of a share-based limited company, liability is limited to the unpaid value of shares. This protects owners and investors from being out of pocket in the event that disaster strikes the business.

Can Personal Debt Affect your Limited Company?

A picture containing personDescription automatically generated

The short answer to this question is no. When you own a limited company you, essentially, become an employee of the company in the capacity of perhaps Managing Director or CEO.  

Because of this, your personal finances and your business finances are considered to be completely separate. So, in most cases, your personal finances will not have any kind of knock on effect on your business. 

Now, we did say ‘in most cases’; the exception to this rule is in the event that credit is issued to your limited company on the basis that you have signed a personal Guarantee or sponsorship document. In this instance, there will possibly be a connection between your personal and business accounts.

What About Partnerships?

Great question! When it comes to business, there are two main types of partnership. There is ‘sole trader partnership’ which means that you may face liability in terms of personal debt, and a ‘limited liability partnership’ (LLP) which acts in the same way as a limited company, therefore liability is limited.  

What about if I’m a Sole Trader?

If you’re operating as a sole trader, then your personal debt will absolutely affect your business. For example, if you are unable to repay your personal debt, you may find yourself in the unhappy circumstances of having your business assets seized in order to cover this debt.

Equipment such as computers may be repossessed as payment or part payment of what you owe.  For this reason, it’s really important that you think long and hard before setting yourself up as a business sole trader and consider, instead, becoming a limited company. 

Freeing Yourself of Personal Debt

If you have a limited company, your liability is limited and your personal and business finance separate. However, that doesn’t mean that you should bury your head in the sand when it comes to personal debt.  

Personal debt has a habit of nagging away at us and can cause a great deal of stress.  If you’re unable to meet your debts through making cutbacks or using savings, an individual voluntary arrangement may be the answer.

What is an Individual Involuntary Arrangement?

An Individual Voluntary Arrangement (IVA) involves a legally binding contract which is drawn up between an individual and their creditors in a bid to reduce or repay the debt. The individual agrees to repay a certain amount over a certain period of time in order to become debt free.  

If 75 percent of all of the creditors agree to the IVA, then all creditors are bound by it, even those who did not agree to take part. An IVA is an alternative to bankruptcy and has a number of benefits to the individual, including: 

  • Reduced pressure as creditors will no longer be chasing for repayment.
  • One lump sum to be paid rather than multiple individual payments.
  • You will potentially end up paying less than the initial debt as many creditors will agree to a reduced payment.

Although this can be a great solution for getting out of debt, you will be subject to set up fees and handling fees. So, you should always do your sums before signing on the dotted line.

You’ll also need to note the length of the agreement and the fact that, for example, if you came into an inheritance before the end of the contract, some or all of this may go to your creditors as part of the agreement. 

A picture containing text, measuring stickDescription automatically generated

Don’t Suffer in Silence Over Personal Debt…

Having any kind of debt can cause a great deal of worry, and more than a few sleepless nights. The good news is that personal debt will very rarely impact on your limited company – so that’s one less thing to worry about.  

Having said that, you should always do whatever you can to reduce or repay your debt and to start with a clean slate. If you’re unable to clear your debts yourself, there is help available either through your bank or through a financial service such as an IVA, so you don’t have to suffer in silence with your debt. 

Please be advised that this article is for general informational purposes only, and should not be used as a substitute for advice from a trained legal or financial professional. Be sure to consult a legal or financial professional if you’re seeking advice about your debt. We are not liable for risks or issues associated with using or acting upon the information on this site.

Images

Towfiqu barbhuiya: https://unsplash.com/photos/3aGZ7a97qwA
Laura Davidson https://unsplash.com/photos/SRhqHvdotuIBrett Jordanhttps://unsplash.com/photos/erLrY4aKztg