Business debts can accumulate for a number of reasons such as:
- Poor cash flow control.
- Excessive perks (such as over expensive cars) charged to the business.
- Excessive wage bills.
- Customers late with their payments to you.
- Spending the VAT and N.I money instead of setting it aside
- Using turnover instead of profit to sustain or expand the business.
- Excessive stock levels, staff pilfering and customer dishonesty.
- Lack of trade, loss of key contracts, more red tape and regulations.
- Excessive personal and business debts requiring you to draw more than the business can afford.
How your business is structured affects how you and your debts are treated. If you are already in business then generally you will fall into one of the three following categories:
Sole Traders: You and the business are one and the same thing, no matter what you trade as. Your personal debts and the business debts are one and the same thing. This is very important.
You do not have a wage in the normal sense; you have a draw against income. Many advisers cannot understand this point, make sure you do. If you are drawing say L500 a week and the business can only afford L100.00 a week then you will be in debt very soon. After a year it will be substantial and may manifest itself in a sizeable overdraft, loans that you may have difficulty in paying or an inability to pay wages and the tax man!
Partnerships: This gets a little more complicated than a sole trader.
The partnership entity can incur debts both in the name of the partnership (e.g. Smith and Jones) and also against the individual partners. For example, you order a load of materials and fail to pay; the invoice is in the business name. The supplier can sue you as both the PARTNERSHIP and as Individuals, normally at the same time. It doesn’t matter who ordered the goods, you are BOTH liable (this is called joint and several liability). This liability is for the entire debt, not your share! As a partner you are liable for ALL the partnership debt.
The business cannot be held responsible for your personal debts BUT if you are personally sued for debt or declared bankrupt then your share of the business could also be at risk as it has a value and is therefore an asset.
 It is possible to bankrupt a partnership but not the individual partners. In reality the pursuers (i.e. the creditors) would bankrupt the partnership and then pursue the partners.
It goes without saying that you should think very carefully about setting up any business this way. From a debt rescue point of view, we see no reason for ANYONE (and especially spouses for that matter) to set up as a partnership. To do so could cost you everything if you get into difficulty. Partnerships can be a nightmare to get out of, think carefully and get our advice BEFORE setting up your business in this manner.! Any tax “advantages” could be well and truly insignificant and mean you pay a very high price if you get into financial difficulties.
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