When you set up in business you normally consider one of two entities – a Sole Trader (or Partnership if there’s more than one of you) or a Limited company. As a limited company your liabilities are limited and the company acts as a wall between you and your creditors (the people you owe money to). As a Sole Trader or Partnership, you are personally responsible for all liabilities your company has. Therefore if your company owes money and cannot pay, you automatically become liable (personally) for it.
This is an important factor to consider when setting up your business, because if you are limited rather than a sole trader and you cannot pay your debts, you have the option to put the company into liquidation and you are only liable for any debts you have personally guaranteed as the director. As a Sole Trader, all debts are your own, which is why you will never be asked to guarantee anything – the creditors don’t need a guarantee because you are financially liable for the debt already. So if you decide to close the business with outstanding debts, your creditors will no doubt pursue you personally to recover their money.
In the current financial climate however, all new start businesses setting up as a limited entity and seeking finance will be asked to personally guarantee the facility, therefore reducing the risk in the funders eyes because they have more security that way. It is very rare for a new start company to be able to source finance without any security simply to give the funders peace of mind that their money is safe.
So when setting up in business and seeking finance, make sure you research the different liabilities that you will shoulder as either a Limited company or a Sole Trader.
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