Can limited company debt affect my personal finances?
Typically no, a limited company’s debt doesn’t affect a director’s personal finances. A limited company provides limited liability to directors, meaning directors’ finances are classed as a separate legal entity from the company.
However, a director’s personal finances could be at risk if a director has:
Personally guaranteed any company debt.
An outstanding director’s loan.
Been found guilty of wrongful or fraudulent trading.
Misused a Bounce Back Loan (BBL).
Who is responsible for limited company debt?
Debts accrued by a limited company belong solely to that company. Limited Liability is afforded to all limited companies and acts as a layer of protection between that company and its directors or shareholders of the business. A limited company is classed as its own legal entity, which means that the finances and assets of the company belong to the company rather than its directors.
The company is, therefore, responsible for its own affairs and paying its own debts, so the limited company’s debts won’t affect your personal finances. If a limited company can’t meet its liabilities, falls into arrears, or enters into liquidation, those responsibilities will not be passed on to the directors.
It is the responsibility of a director to ensure that they act in the best interests of the company and promote its success. If the company becomes insolvent, a director’s responsibilities will apply towards ensuring the best return for creditors.
When are you personally liable for limited company debt?
Directors of limited companies are normally protected by limited liability, and not personally liable for the debts of their limited company. However, in some circumstances, a director can be liable for certain debts within the company. These can include but are not always limited to:
Personal Guarantees Directors are sometimes required to sign personal guarantees or give security on personal assets to secure funding from lenders. These guarantees act as security for the lenders and bypass the limited liability. If a company becomes insolvent and a guarantee has been signed the director will be held personally responsible. Find out more about personal guarantees
Overdrawn directors loan account Director’s loan account is a record of transactions between a company and its director. If there is an overdrawn directors loan account, in which the director owes the company money, the director will be personally liable for repaying that loan in the event of a liquidation. Find out more about director’s loan accounts
Wrongful or fraudulent trading If a company becomes insolvent and can’t cover its outgoings, directors could face allegations of wrongful or fraudulent trading if the company continues to trade beyond a point where the director knew, or ought to have known that the company could not avoid insolvency. If a director is found guilty of either of these offences, it could result in legal action such as fines, directors bans and personal liability for company debts. Find out more about fraudulent and wrongful trading
Misusing a Bounce Back Loan Bounce Back Loan misuse can involve obtaining loans through false information, using funds for unauthorised purposes, or engaging in activities that don’t align with the scheme’s terms and conditions. Find out more about bounce back loan misuse
Personal debts and sole traders
Personal debts are those that are related to someone as an individual. These debts can be caused either by working as a sole trader, or by personal expenditure, as they are not classed as separate entities.
If you’re a self-employed sole trader, you and your business are the same legal entity. If you get into debt, even if it’s related to your business, the lender will see your personal finances as part of it. So, you could be personally responsible for paying the debt, meaning you may have to use your own money and potentially sell your assets.
How we can help
If you are looking for advice on company debt, our experienced initial advice team can assess your company’s circumstances, provide free confidential advice, discussing any specific concerns you may have.
Speak with our initial advisers via phone or online chat. If we can help, we will arrange a free consultation with one of our consultants to discuss your situation in more depth.
During the consultation, we will advise if an insolvency procedure is the most appropriate route forward, or what alternative options are available.
After your consultation, if there is an appropriate route forward, we will issue the relevant documentation for you to formally engage us.
In summary
Company debt and personal debt are separate entities, although some company debt can affect you personally. Directors of limited companies are protected by limited liability which means they are not responsible for debts accrued by the company. However, if a director has signed personal guarantees, has an overdrawn director’s loan account, or is found guilty of wrongful or fraudulent trading they could be held personally liable for some limited company debts.
