Many businesses, small or large, require credit to start trading as the initial costs and overheads can be considerable.Once established, the business may also require further credit facilities to allow investment in new stock or to allow the business to function while waiting for payment from customers.
Liability for business debts depends on the type of business you are involved in.
- A sole trader is responsible for all business debts, in exactly the same way as they would be for personal debts. If they are unable to pay they may be made bankrupt.
- The partnership agreement will set out your share of the profits but you are jointly and severally liable for all of the partnership debts.
- A limited company is a legal form of business that exists independently of the people involved. The shareholders and directors aren’t held personally responsible for any business debts, unless they have acted as guarantor.
Some businesses are run by co-operatives, which are governed by the Industrial and Provident Societies Act and not the Companies Act. The profit made by a co-operative company is not distributed to its shareholders but goes back to the company.
This type of company protects its shareholders from responsibility for any company debts.
See business debts for further advice
To find out more about Reasons for debt click here