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National Debtline

Advice you can trust

Business status

Why it is important

Before you start to deal with your debts, it is important to know what your business status is. This helps you work out your budget and understand which debt options you have.

Status types

  • If you run your own business you will normally be a sole trader, a partner in a partnership or a director of a limited company.
  • There are also other types of business status, such as limited liability partnerships (LLPs) or charities.
  • When dealing with business and personal debts it is important to know your business status.
  • This page gives a brief description of each status.
  • Also be aware that if you work in the construction industry you might also need to be registered as a Construction Industry Scheme (CIS)subcontractor.
  • If you are unsure of which status you are, contact us for advice.

Sole traders

  • You are a sole trader if you run your business as an individual and you work for yourself.
  • You are personally liable for all of your business debts.
  • This means if you do not pay your creditors, your business and personal assets could be at risk.

 

Limited companies

  • A limited company is a separate legal entity from its directors and shareholders.
  • It must be registered with Companies House and send them accounts each year.
  • You are not usually personally liable to pay back company debts, unless you have given a personal guarantee or committed a director's offence.

 

Partnerships

  • This is where two or more people carry on a business with the aim of making a profit.
  • All partners are liable for all business debts apart from their own income tax and National Insurance contributions.
  • This means if you do not pay your creditors, your business and personal assets could be at risk.

 

Limited liability partnerships (LLP)

  • A LLP is a separate legal entity from its members. It is similar to a limited company, but also shares some features of a partnership.
  • LLPs must be registered with Companies House and have at least two members.
  • Members of a LLP are responsible for their own income tax and National Insurance and have duties and responsibilities as shown in the LLP agreement.
  • There must be at least two 'designated members' who have extra legal responsibilities, such as keeping accounting records.
  • You are not usually personally liable to pay back LLP debts, unless you have given a personal guarantee or committed a member's offence.

 

Charities

  • There are several ways that a charity can be set up. The structure of your charity will affect how it is run and whether you are liable for its debts.
  • There are four main types of charity structure. These are: a charitable incorporated organisation (CIO), a charitable company, an unincorporated association and a trust.
  • If your charity is a CIO or a charitable company, then you and the other trustees are not usually liable for its debts.
  • If you charity is a CIO, or has an income of at least £5,000, it must be registered with the Charity Commission.

 

The Construction Industry Scheme (CIS)

  • If you are a subcontractor and work in the building industry, the contractor will usually deduct 20% from your pay. This is sent to HM Revenue & Customs (HMRC) as an advance payment towards your income tax and National Insurance contributions.
  • Your contractor should give you a monthly statement showing what has been taken from your pay. Keep these statements.
  • You need to register for the CIS with HMRC. If you do not register the contractor will take a higher percentage from your pay.
  • Subcontractors can be sole traders, partners or other types of business.
  • If you are a sole trader or a partner, you still have to complete self-assessment tax returns.
  • HMRC will issue a refund if you have overpaid through the CIS deductions.
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Useful links

You can also find useful information on the following sites.

Chambers of Commerce

Federation of Small Businesses

HM Revenue & Customs

TaxAid

GOV.UK

Your budget

  • Once you know your business status you can do a budget.
  • You need to work out a budget before tackling your debt problems.
  • After working out your income and outgoings for your business and  household, you will be able to see how much you have left over.
  • You can then decide on the best way to deal with your debts.