Business status

​There is a lot of confusion about what it means to be a sole trader, partnership or limited company.  These terms are used to describe the status of a business. Before starting to deal with your debts, it is important  that you understand which term describes your business and which budget you should use.

Which budget?

If you are a sole trader, a partner in a partnership or a director of a limited company, you can use Your budget to work out a budget. You can use this budget to help negotiate with your business and personal creditors and choose the right debt option for you and your business.

Sole trader

See our fact sheet:

Sole traders.

This is where you are an individual and work for yourself. You may also have people working for you. All bills, bank statements, invoices, letterheads and other business correspondence have just your name on them. Even if you trade using a business name, you cannot separate yourself from your business debts.

You are personally liable for all of your business debts. This means you have to pay these debts out of your own income, even if you have stopped trading. If you do not pay, the creditors you owe money to could take further action against you personally. If this happens, both your business and personal assets could be at risk.

Partnerships

A partnership is two or more people carrying on a business, with the aim of making a profit. A partnership must have at least two partners. Most partnerships can have no more than 20 partners, except  for firms of solicitors and accountants.

By law, you do not have to have a written partnership agreement, though you may decide it is a good idea to have one. Otherwise, all you need to do to show you are a partner of the business is put your name on the business notepaper as a partner.

Information:

income tax

Partners are taxed only on their share  of the business profits. If one partner owes income tax, Her Majesty’s Revenue  & Customs (HMRC) cannot claim it from the other partners.

In a partnership,  all partners (separately and together) are liable for all business debts. This is known as ‘joint and several liability’ and means that all partners have to pay these debts out of their own income, even if the partnership has stopped trading. If any of the partners do not pay, the creditors can take all the partners to court for the total debt. Your business and personal assets could be at risk. It is not possible to divide up responsibility for the debts. If the creditors cannot get one partner to pay the debt, they will claim payment in full from the others.

If you leave the partnership, write to all the business’s creditors to make sure they know that you will not be responsible for any new debts after the date that you left. Keep a copy of all the letters you send. Make sure that your name no longer appears on the business’s notepaper and ask the bank to take your name off any business accounts.

If you have given a personal guarantee or a legal charge to a bank as security for the business’s debts, make sure the bank accepts that you are only responsible for any debts that built up before the partnership ended. A personal guarantee means you have signed an agreement to say you will pay the money back yourself, even if the business
closes. You need to do the same thing for any business overdrafts.

See our fact sheet:

Partnerships.

If one partner goes bankrupt, although creditors will cancel the debt for that partner, they can still try to get the whole debt back from the other partners. This means that partners with the most assets have the most to lose.

If you have had to pay a partnership debt, you have the right to take the other partners to court to get back the money for their share of the debts. If one of your partners has paid a partnership debt, they can take you (and any other partners) to court to get back the money for your share of the debt.