Sole trader insolvency: financial options

Although there are tax accounting differences between a sole trader and limited company, the largest difference you are likely to encounter is if your business has financial worries.  A limited company is separate from its owners, and has a larger selection of formal insolvency options available to it; all of these have no immediate effect on its directors or shareholders personally.  For a sole trader, however, in the eyes of UK company law, your personal assets and liabilities are treated the same as your business’ assets and liabilities. This means that any business debt is personally owed, and is recoverable from personal assets.


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Am I a sole trader?

A sole trader is defined as an individual business owner who by definition owns all business profits after tax, and is also personally liable for all debts.  Whilst it is easier to set up a business as a sole trader, working for yourself in this way means that unlike a limited company, you do not have the protection of limited liability.

The sole trader insolvency risk

As we’ve mentioned, as a sole trader, if your business becomes insolvent you will be personally liable for all its debts. This means that assets such your home will be at risk.

Ultimately, there is no separation between business and personal in relation to sole trader debts. At an early stage of debt problems, any adverse credit will be filed against your name personally. This can have a much greater, negative impact on your personal finances, where mortgages or even home rental applications are concerned, for example.

Options for sole traders in financial trouble

Formal insolvency options

There are two formal insolvency options available to sole traders:

  • Bankruptcy: if you are planning on continuing to run a business, it is usually best to avoid bankruptcy. Bankruptcy places restrictions upon your ability to trade as a sole trader, whilst also prohibiting you from acting as a director.
  • Individual Voluntary Arrangement: IVAs are legally binding on all creditors, and as long as you make sure you stick to the arrangement, an IVA will protect you from bankruptcy and further legal action. IVAs usually last for 5 years. Depending on how much you owe, and how much you can afford to pay back, there may be a reduction in the amount you have to repay.

Informal insolvency options

There are also two informal options, which operate in a similar way to the corporate options of the same name. Follow the links for more information on each:

Time to pay arrangements, and informal arrangements are a less expensive way of reaching agreement with creditors. They are not legally binding, but if used correctly, they can be just as effective as IVAs.

In general, informal arrangements are better suited where there are lower numbers of creditors, and repayment will be made in a shorter space of time (normally less than two years).

In summary

IVAs, time to pay arrangements, and informal arrangements offer 3 quite different ways for a sole trader to restructure their debts.  All of these options take account of business debt, but also unsecured personal debt, such as credit cards too.  Which one suits you best will depend on your level of debt, and your future plans.  

If you would like to find out more about any of these options, don’t hesitate to contact one of our business rescue experts directly.