Business Coachingbusiness growthFinanceProcess Improvementsmall-businessCan Personal Debts Affect Your Limited Company?

January 19, 2023by nicoleevansmcda0


How does debt impact your limited company? We are all aware that our personal credit scores can have an impact on how much money we can borrow for a loan. This post will address this issue and offer advice on how to lower personal debt.

Even though it’s advised to never combine business and pleasure, it’s possible when you run your own firm to blur such boundaries. There are several situations where your personal situation can have an impact on the company you operate.

It’s crucial to understand how, for instance, personal debt may impact your business. It’s not always considered to be separate from your business accounts.

Although you can make individual voluntary arrangements to lower your personal debt, is this prudent and what are the effects? Let’s explore this in greater depth…

What is a Limited Company?

A limited company is among the most widely used business structures since it is made to reduce personal liability for shareholders and owners. With a limited company structure, investors or subscribers are only accountable for the sums they have guaranteed or contributed to the business.

A share-based limited company’s liability is capped at the unpaid share value. This prevents owners and investors from losing money in the event that the company experiences a catastrophe.

Can Personal Debt Affect your Limited Company?

The short answer to this question is no.  Owning a limited company essentially makes you an employee of the business, potentially as the managing director or CEO.

Your personal funds and your corporate finances are regarded as being entirely distinct as a result. Therefore, in most situations, your personal finances won’t typically have any kind of negative impact on your business.

We did mention “in most situations,” but there is one exception to this rule: if credit is given to your limited company because you have signed a personal guarantee or sponsorship agreement, the exemption to this rule will apply. There can be a relationship between your personal and corporate accounts in this situation.

What About Partnerships?

There are two types of partnerships in business. Limited liability partnerships (LLP), which function similarly to limited companies and hence limit responsibility, and Sole Traders Partnerships, which may subject you to liability for personal debt.

What about if I’m a Sole Trader?

Your personal debt will unquestionably impact your firm if you’re a sole trader. For instance, you can find yourself in the unfortunate situation of having your business assets confiscated in order to pay off this obligation if you are unable to settle your personal debt.

Repossessed property, including computers and technology, may be used to settle your debt in full or in part. Because of this, it’s crucial that you give it some serious thought before forming your firm as a sole proprietorship and consider turning into a limited company instead.

Freeing Yourself of Personal Debt

If you own a limited company, your liability is constrained, and your personal and business finances are segregated. On the other hand, this does not imply that you should ignore your personal debt.

We often feel the nagging effects of personal debt, which may be extremely stressful. An individual voluntary agreement can be the solution if you are unable to pay your obligations by making sacrifices or utilizing your savings.

What is an Individual Involuntary Arrangement?

A legally enforceable agreement known as an Individual Voluntary Arrangement (IVA) is made between a debtor and their creditors in an effort to reduce or repay the debt. The borrower consents to make payments totaling a specific sum over a specific amount of time in order to pay off their loan.

All creditors, including those who declined to participate, are obligated by the IVA if 75% of all creditors approve it. An IVA, which is a better option than bankruptcy, offers the following advantages to the individual:

  • Reduced pressure as creditors will no longer be chasing for repayment.
  • One lump sum to be paid rather than multiple individual payments.
  • You will potentially end up paying less than the initial debt as many creditors will agree to a reduced payment.

There are startup fees and handling fees involved, despite the fact that this can be a terrific debt relief strategy. So, you should always do your sums before signing on the dotted line.

You should also be aware of the duration of the contract and the possibility that some or all of any inheritance you get before it expires may be distributed to your creditors as part of the arrangement.

Don’t Suffer in Silence Over Personal Debt…

Any type of debt can be extremely stressful and contribute to numerous restless nights. The good news is that personal debt rarely affects your limited company, so you can relax knowing that.

Having said that, you should always make an effort to pay down or return your debt so that you can start over. You don’t have to suffer in silence with your debt if you’re unable to pay it off on your own. Help is available through your bank or a financial service. MCDA CCG, Inc can help you with your financial needs.


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