Debt Advice Handbook 14th editionChapter 16: Business debts 2. Types of small business
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2. Types of small business
Most self-employed clients that debt advisers deal with run their businesses on their own. However, their situations can vary greatly. For example, a client who says they ‘just work for themself’ may be set up as a sole trader or as a director of a limited company. It is important to identify how a client is set up in business (his/her trading status) because this affects which debts s/he is liable for and when specialist advice is needed.
Trading status also affects the type of financial statement that a client needs to complete (see page here).
If a client is unsure of her/his trading status, s/he could ask her/his accountant or bookkeeper for information. If this is not available, signpost the client to specialist business advice.
Sole trader
A sole trader is a person who is self-employed and runs her/his business on her/his own (without any business partners). Sole traders can use their own name for their business or use a separate business name. Sole traders do not register their business with Companies House and their business name should not end with ‘Ltd’ or ‘limited’.
Sole traders are legally responsible for their business. They are personally liable for any debts created through running their business and personally own any business assets.
Typical sole traders might include plumbers, electricians, taxi drivers and sales people who work on a purely self-employed basis.
Giving advice to a sole trader
A sole trader and her/his business are one and the same. If the business is struggling to pay its debts, then the client’s personal income and assets may be at risk. Consider the client’s overall situation.
 
If a client is still trading
You may be able to give advice about dealing with personal debt emergencies, such as council tax enforcement agents (bailiffs) and, if it has been established that the advice will not negatively impact on the client’s business, provide basic advice about dealing with personal creditors. You may also be able to advise the client about the implications for continuing to trade, such as the risk to assets and further indebtedness.
Specialist advice is needed if the client has any business debts or any complex business issues, such as a disputed tax debt. The client also needs specialist debt advice before deciding how best to proceed with her/his debts. A specialist adviser looks at the client’s overall situation (at home and in the business) and also discusses how any action that the client takes could affect her/his ability to continue in business. For example, a sole trader plumber who relies on trade credit for her/his business supplies may struggle to meet the credit limits imposed by a debt relief order (DRO). The client needs to be prepared to inform the supplier about the DRO if s/he borrows more than the limit imposed by the restrictions (see page 000) during the moratorium. Such a disclosure could put the client’s supply at risk.
 
If a client has ceased trading
You need to check whether the client has any complex business debts, such as an ongoing liability for a business lease. If any complex debts are identified, the client needs specialist advice. Specialist advice might also be needed if the client has a disputed tax debt or has failed to submit tax returns (see TaxAid1taxaid.org.uk).
Providing the client does not have any complex business advice needs, you can usually give the client full debt advice. You should check whether the client has told her/his creditors, suppliers and HM Revenue & Customs (HMRC) that s/he has stopped trading and give advice on that if needed.
 
1     taxaid.org.uk »
Partner in a business partnership
A business partnership can exist when two or more people carry out a business together to make a profit. A partnership is sometimes also called ‘a firm’.
A partnership can trade using the names of the partners or by using a separate business name. Partners do not register the partnership with Companies House and their business name should not include ‘Ltd’, ‘limited’, ‘LLP’ or ‘limited liability partnership’.
A partnership may be set up formally through a written partnership agreement. The written agreement should cover how any profits in the business are shared out between the partners and how the partnership can be ended. Unless the partnership rules state otherwise, contracts can be entered into by any of the partners. The partnership agreement can be useful if there is a dispute between the partners.
A partnership can also be entered into informally. A written agreement is not needed for a partnership to exist, and the Partnership Act 1890 applies in the absence of a written agreement. The partners share equally in the profits and losses of the business unless otherwise agreed. Sometimes, it can be difficult to identify whether a business partnership exists if there is no written agreement. If you are unsure whether a business is being run as a partnership, seek specialist advice.
Usually, partners personally own a share of the partnership’s assets and are jointly and severally liable for the debts accrued by the partnership. However, each partner always has sole liability for her/his own income tax and national insurance contributions.
    •Unless there is an agreement that states otherwise, a partner is not liable for debts accrued by the partnership before s/he joined.
    •Unless the other partners and creditors agree otherwise, a client who has left a business partnership continues to be liable for the debts accrued during the time s/he was a partner.
    •Unless suitable notice is given to creditors and the client’s name is removed from the partnership’s paperwork, a client could be held liable for partnership debts that are accrued after s/he leaves the partnership. The client also needs to check the terms of any written partnership agreement.
It is important that a client does all s/he can to limit her/his personal liability for any existing or future partnership debts. If a client is considering leaving a business partnership or disputes liability for a partnership debt, signpost the client to specialist advice.
Giving advice to a business partner
If the client or the partnership is struggling to pay debts, then the client’s income and assets (at home and in the business) may be at risk. Consider the client’s overall situation.
 
If a client is still trading
You may be able to give advice about dealing with personal debt emergencies, such as council tax enforcement agents, and also provide basic advice about dealing with personal creditors. You may also be able to advise the client about the implications for continuing to trade, such as the risk to assets and further indebtedness. Since partnerships can be complex, it is often best to seek specialist advice.
Specialist advice is required if the client has any business debts or any complex business issues, such as a disputed tax debt. The client also needs specialist debt advice before deciding how best to proceed with her/his debts. A specialist adviser looks at the client’s overall situation (at home and in the business) and also discusses how any action that the client takes could affect whether the client and the partnership can continue in business. The client also needs to be aware that some strategies, such as an individual voluntary arrangement, do not usually offer the same protection for partnership debts. In some cases, separate strategies may be required to deal with the partnership’s debts. Specialist advice is required.
 
If a client has ceased trading
You need to check whether the client has any complex business debts, such as an ongoing liability for a business lease. If any complex debts are identified, the client needs specialist advice. Also check whether the client notified her/his creditors, suppliers and HMRC that s/he had stopped trading with the partnership and complied with the terms of any partnership agreement. If you are unsure whether the client has exited the partnership appropriately, always signpost the client to specialist advice. It is important to do that because specialist advice may help the client to limit her/his personal liability for any existing or future partnership debts.
Providing there are no complex debt needs and the client has exited the partnership appropriately, you can give full advice about dealing with the client’s debts.
Director of a limited company
A limited company is a separate legal entity and must be registered with Companies House. A limited company’s name must usually end in either ‘limited’ or ‘Ltd’.
A limited company can be set up as a private company (in which shares are owned by and transferred between a limited number of people) or as a public company (in which shares can be bought and sold on the stock market). The most common type of limited company that business debt advisers deal with is a private company.
A limited company is owned by its shareholders and run by its directors. Many small companies are run by just one person, who is both the director and shareholder.
Since a limited company is a separate legal entity, it can own assets and is liable for its own debts. A limited company will need to comply with company law, as well as important documents lodged with Companies House (the memorandum of association and articles of association). Dealing with limited companies can be complex. Advisers should signpost clients to specialist advice if there is an issue with the limited company.
A director of a limited company has duties and responsibilities to the limited company. A director is not usually liable for the limited company’s debts unless:
    •the director gave a personal guarantee; or
    •the company was dissolved (struck off) or liquidated and following an investigation it was decided that the director had acted inappropriately in her/his role.
A director could have acted inappropriately in her/his role for many reasons. Here are a few examples:
    •acting fraudulently towards the company’s creditors;
    •taking money from the company for their own use at the expense of the company’s creditors;
    •increasing a company’s debt by continuing to trade a company while it was insolvent, when there was no reasonable chance that it could trade out of its difficulties. Although, from 1 March 2020 to 30 September 2020 and from 26 November 2020 to 30 June 2021, the rules for this type of offence were suspended by the government. This was due to the coronavirus pandemic and to help company directors continue to trade during this period.
If a director disputes liability for a limited company debt or liability is unclear, signpost the client to specialist advice.
Giving advice to a director of a limited company
The limited company is a separate legal entity to the director, with its own debts and assets. A director should be signposted to specialist help for all matters that relate to the limited company, including how to close the business.
 
If a client is still trading
The status of a limited company as a separate entity should usually allow you to give advice to directors on their personal debts. However, because personal and business finances often become merged for these clients, there are some common issues that you need to consider.
    •Personal debt issues for a director of a limited company often indicate problems with the limited company. For example, it may indicate that the client is using personal credit to prop up the limited company. Explore the reasons for the client’s personal indebtedness. If the client’s debts are caused by the limited company’s performance, signpost the client to a specialist adviser.
    •Make sure that the client has checked whether s/he has given any personal guarantees for the limited company. If s/he has, s/he needs to consider how certain strategies may affect the limited company. This can be particularly important if a guarantee exists but has not been called in. Signpost the client to specialist business advice if that is the case.
    •Suggest to the client that s/he also gets specialist business debt advice before deciding how to proceed with her/his personal debts. The client needs to consider whether any action s/he takes to deal with her/his personal debts could affect her/his ability to continue acting as a director.
 
If a client has ceased trading
You should check whether the client has closed the business or resigned as a director. Signpost to a specialist business adviser for advice on leaving or closing the business if that is needed.
Make sure that the client has checked whether s/he has given any personal guarantees for the limited company debts. If a personal guarantee relates to a complex business debt, such as an ongoing business lease, the client needs specialist advice.
Providing the client does not have any complex business debts that require specialist help, you can give the client full advice on their personal debts
Member of a limited liability partnership
A limited liability partnership (LLP) is a separate legal entity that is run by its members. An LLP must be registered with Companies House and has some characteristics of a partnership and some of a limited company. The liability of a member of an LLP to pay towards the debts of the LLP is usually limited to the value of the assets that the member put in the business. LLPs are commonly used by solicitors and accountancy businesses.
Debt advisers rarely deal with LLPs. Specialist advice will usually be needed if the client is trading as a member of an LLP or wants to stop trading as a member of an LLP.
Client with a franchise agreement
A franchise is a business agreement. It allows a client to run a branch of an existing business using the established business’s name. A client who has bought a franchise can usually decide how to set up her/his business, for example, as a sole trader, a partner in a business partnership or as a director of a limited company.
Debt advisers rarely deal with franchises. Specialist advice is needed if there is any doubt about a client’s liability or if the client wants to end the franchise agreement.
Member of a co-operative
A co-operative is a business that is owned and controlled collectively by the people who work for the business. Debt advisers rarely deal with co-operatives. Specialist advice may be needed as it can be difficult to establish a co-operative member’s individual liability for any business debts.