We’ve looked previously at the options that limited companies have available to them if they are struggling; we’ve covered everything from turnaround advice, Company Voluntary Arrangements (CVA) and Liquidation. But what options are there for sole traders and partnerships that do not have the same kind of legal protections that being a limited company can bring?

Directors of limited companies are legally protected from the debts of their business; but if you are a sole trader or a partnership then in the eyes of the law there in no difference between you personally and your business. Therefore, all liabilities of the business are considered personally yours and are treated the same, as are any assets.

In a partnership the liability for the businesses debts is often ‘joint and several’ meaning that all partners are liable for all the debts. If one partner were to become bankrupt for example, although the debts will be discharged for that partner, the other partner or partners are still fully liable and creditors are still able to pursue them for the whole debt. It is important to seek help and make decisions jointly between the partnership to find the best solution for all involved.
As a sole trader or partnership, if you struggle to meet your businesses debts as and when they fall due for any reason, then it is vital that you seek professional advice right away to protect your position.

The options available are essentially the same as those available to an individual with debt problems and provide the same protections from creditors.

Debt Management Plan (DMP)

Just like an individual entering into a debt management plan, a reduced monthly payment will be negotiated with all unsecured creditors, and payments will continue to be made until the debt is paid in full. There is however no legal protection from creditors and they may decide at any point to take steps to recover the debt with the use of bailiffs and court action.

Individual Voluntary Arrangement(IVA)/Partnership Voluntary Arrangement (PVA)

If business is good but you begin to have cashflow problems due to late paying debtors or you are juggling your creditors from one month to the next but your business is viable on paper, then as long as you have spare income after all your preferential outgoings are accounted for, an IVA/PVA may be the best option.
Since your business and personal debts are considered the same in the eyes of the law then they can all be placed together into an IVA/PVA and as long as you meet your monthly contributions; you and your business will be debt free in 5 years. Anything that has not been able to be paid back at the end of the 5 years is written off. An IVA will provide full legal protection from your creditors.

Debt Relief Order (DRO)

A debt relief order is an alternative to going bankrupt and allows those with low amounts of debt, no assets and low income to avoid bankruptcy. As with bankruptcy you will be debt free in one year but if your position improves whilst you are subject to a DRO you will be asked to make payments to your creditors. You can see the criteria for a debt relief order.

Bankruptcy

Bankruptcy is the procedure whereby an individual, sole trader or partnership may be declared insolvent.  Bankruptcy however is a severe last resort that should only be considered if the business’ debts are extremely serious and there is no other alternative. Your business in most cases would be closed down or sold dependant on its circumstances. You would be discharged from bankruptcy after one year.

What Next?

Whether you want to rescue your business or finish trading; it is important to seek the right advice as soon as a problem is detected. Focus Insolvency Group are licensed insolvency practitioners and can provide you with free and impartial advice about sole trader and partnership business debts and solutions through our personal debt arm Debtfocus. If your problems are less severe; then our financial services arm, Moneyfocus may be able to help to raise capital or provide funding on your outstanding invoices.

Get in touch today.