It’s a common dream to own your own business but sadly, things don’t always go to plan. And if your business ends up crashing down around your ears, the last thing you want is your personal life following suit. This article from bankruptcy experts, Bankruptcy Clinic, offers a few useful pointers to help protect your personal assets if the worst happens to your company.
- Sole trader? Tread carefully!
Many people start their self-employment journeys as a sole trader. It’s quick, cheap and relatively simple to set yourself up as a sole trader – but you’ll be at more risk than with any of other company status. Effectively, you’re on your own, with anything belonging to the business also belonging to you personally.
In short, this means that any debts incurred by your business could become your personal debts. Even if you have completely separate accounts for business and personal banking, loans and credit cards, your creditors can – and will – pursue you personally for repayment if the business fails.
At worst case scenario, this could lead to you declaring bankruptcy voluntarily, or being forced into doing so. In turn, this could result in you losing your home and any valuable personal possessions as well as business assets such as office premises, vehicles and equipment. You may have to close down the business, or face severe restrictions on how you can trade during your bankruptcy period – which wouldn’t help your reputation.
On a brighter note, bankruptcy can sometimes be avoided by negotiating a payment plan with your creditors or entering into an Individual Voluntary Arrangement (IVA). Bankruptcy Clinic can provide access to these options, so if you’re a sole trader experiencing financial problems, get in touch to find out how we can help.
- Consider going limited
Setting up a limited company is a bit more complicated than becoming a sole trader, but as the name suggests, you’ll have the advantage of limited liability if something goes wrong. Your personal liability will be restricted to the value of the shares you hold in the business. So if you own 500 shares worth 10p each, your liability will be limited to £50, helping to protect your personal assets if your business runs into problems.
However, there are still potential pitfalls with a limited company. For example, take a young company that needs upfront funding to get started. With few assets and little value to secure a loan against, you may find it hard to get credit without offering a personal guarantee, which could involve using your family home as security.
This may seem like a good idea, but even if the business does well, unexpected factors could cause issues. For example, your lender could ask for a bank overdraft to be repaid in full when the renewal date comes around, or a sharp rise in interest rates could make a business loan unaffordable. If this happens, your lender could call in your personal guarantee – bypassing the protection offered by your limited liability status.
- A word about partnerships
Another option for setting up a company is to consider a partnership. Traditional partnerships are formed when two or more sole traders come together to form a single business. As you’d expect, this option offers no more protection than trading on your own.
In fact, you could find yourself in even deeper water if the business runs up debts that your partners can’t afford to repay. If you have personal money or assets that can be used for this purpose, you could be forced into bankruptcy.
A better option would be a limited liability partnership, a status often used by law and accountancy firms. Each individual sets up their own limited company, but works together as a partnership under a single name. If a financial problem arises anywhere in the business, each individual’s liability is limited to the value of their shares, helping protect their personal assets.
- Explore your funding options
As noted above, it can be hard to get traditional business funding for a new company. But with the recent economic downturn, even well-established firms are having trouble accessing loans and overdrafts that are secured purely against the business.
Luckily, there are some different funding options you can explore which don’t involve putting your personal finances on the line. These include:
- Investor funding, where the investor takes the hit if the venture fails. However, the investor will own shares in your company and could interfere in how it’s run.
- Crowdfunding platforms such as Kickstarter, where members of the public donate towards an initiative without expecting anything in return.
- Grants from government bodies or private trusts. These aren’t secured against the business and don’t normally need to be repaid.
- Invoice discounting, which involves selling your outstanding customer invoices to a third party for an upfront fee.