There are many benefits to running your business as a limited company. Not only can a limited company come across as more professional than sole traders, but it adds security to those who are in charge of it, as liabilities are limited among shareholders. This kind of setup offers more financial security to owners, often making it preferable and more secure.
Finances surrounding limited companies benefit the directors and owners through being separate to private finances. However, this also means that any and all profits belong to the company rather than any sole individual, meaning that it is intended to be distributed throughout the business instead of going directly into the pocket of the person at the top of the food chain.
It could even be the case that profits are spread to workers that wouldn’t usually be included in significant financial dividends such as paid interns and part-time employees, as well as any partnering company or affiliate that could take a percentage of profits merely through the business being labelled as limited.
It can be a concern for new business owners to establish where the accountability lies in instances where the company owes a large sum of money to another company or individual. Profits are likely to be spread throughout the company, distributing wealth to all of its workers, but another matter is working out if directors and other key members of the business are liable to repay hefty fees if the company doesn’t possess the necessary funds itself.
Is a director responsible for limited company debt?
Liabilities in business are a form of debt that your company is solely responsible for. A liability could take the form of taxes, invoices from clients, loans, or another form of finance such as the rent for the office your company uses. Whether business debts are under the jurisdiction of an individual or the company itself can be confusing, but it’s crucially important to distinguish the difference between the two, as it could become a major issue if anything unpaid is required on behalf of the company.
For the most part, a limited company’s debts wouldn’t be the responsibility of the director or any other high ranking members of staff such as CEOs or majority stakeholders. Due to the company being recognised as a separate legal entity to any single individual such as its directors and shareholders, the company is solely responsible for any debts incurred.
Although most general company debts will automatically go down as being something the company must deal with, there are some circumstances where the director is accountable. Any cases of wrongdoing from the director would go down as being his or her responsibility to pay for, making it completely separate from any debts accrued by the business.
The most common financial problems where the director is responsible include any overdrawn accounts that were in his or her name, irresponsible disposal of company assets, shareholder dividends during company insolvency, fraudulent debt, signed personal guarantees, using company money for non-business reasons, and misconduct involving company money.
Who is liable for limited company debts?
A benefit to running a limited company is that, unlike sole trader companies, there’s a clear distinction between your personal account and your business account. This is positive news for any director that’s concerned about having to pay for any outstanding company debts as long as they’ve not actively taking part in any wrongdoing, but it does leave a question mark over how the debt gets paid.
Before any other enquiries are made, all assets of the company are used to pay off any outstanding debts, whether that entails using any money in circulation of the company or selling assets in order to create the necessary funds to fulfill the outstanding debt. When a company is under liquidation, an insolvency practitioner or IP will carry out the process, selling company assets to pay off remaining debts and dealing with any remaining affairs that are mandatory to close the business.
If the company doesn’t possess enough assets, compulsory liquidation can be requested by way of a court order, and if there’s no assets at all, the last possible options are to request to be struck off, making your company no longer registered, or to apply for administration, where an IP finds ways to continue running the business.