Debt is one of the biggest concerns for business owners – particularly in relation to how debt affects your personal finances. Whether you’re a one-person company or a director in a larger organisation, understanding how debt works and whether you might be liable is critical for everyone involved in business. 

Simply put, a private limited company is a legal entity which typically protects individuals from being legally liable for debt. However, it’s not quite as straightforward as you might think. There are still some instances in which individuals are liable for company debts, which means you need to be extremely careful when making financial decisions on behalf of your company. 

In this guide, we’ll explain the basics of legal liability, clarify any misconceptions, and explain what to do if your business encounters legal difficulties.

At Crunch, we work with businesses to make accounting easy. While our expert accountants and cloud-based software can help your business file tax returns, keep up with invoices, and chase client payments, you still need to seek legal advice if you are in a position where debt may impact your business or personal finances.

If you’re here to learn more about a limited company's debt liabilities, keep reading. If you need information on Sole Trader liability or how to protect yourself with insurance, check out our article, "Sole Trader liability insurance guide" for all the details.

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Private limited company structure

A private limited company is a business that is registered with Companies House. Business owners often choose to start a limited company to create a separate legal entity from themselves. Even if you are just one person, you might opt for a limited company over sole tradership for this reason, especially if you intend to grow. 

A limited company needs at least one shareholder and one director who is a natural person (not a company) – this can be the same person, but there are benefits to having a small number of people of significant control. 

A typical limited company has: 

• At least one director (who is a natural person)
• At least one shareholder (who is a natural person)

…this can be the same person, but there are benefits to having a small number of people of significant control. You can learn more about how many directors are right for you in our dedicated guide.

Some limited companies also appoint a company secretary, either an existing employee or an external company, to oversee the company's administrative duties.

Out of all of these people, who is responsible for the debt in a limited company?

To better understand how debt works in a limited company, we need to explore the separation of company and personal debts.

Examples of company debt include:

• Business loans: A loan taken out in the company name, and not the name of any of the directors or shareholders, without a personal guarantee (more on that later)
• Business overdraft: An overdraft facility with a business bank account in the company’s name (without any personal liability; check the terms!)
• Invoice finance: A short-term loan borrowed against the value of unpaid invoices 
• Asset finance: Leasing or financing company vehicles or equipment to spread the costs over time.
• Trade credit: Buy now, pay later schemes from suppliers (e.g., 30-day payment terms or monthly instalments)
• Overdrawn director's loan account: If a director borrows money from the company and becomes overdrawn, it’s considered a form of company debt. However, if the company is liquidated, the liquidators might find the individual personally liable for this debt.

Please note: these are just examples of company debt; not all loans and finance products are the same, so check the terms and conditions to determine whether only the company is liable, or if you need to sign a personal guarantee, which will make you and/other persons of significant control liable for company debt. 

Seek legal advice if you are unsure who is responsible and what this might mean for you and your company.
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When am I liable for company debt?

Here are some examples of instances in which company debt may become a personal liability for directors:

• A personal guarantee on a loan: When taking out a business loan with a bank or another finance provider, you might be asked to sign a personal guarantee, which means they can pursue the director’s personal assets, such as your home or savings.
• Wrongful trading (Insolvency Act 1986): If a company goes into debt and its directors continue to trade despite knowing that the business cannot avoid insolvency, after liquidation, the court may rule the directors personally liable for repaying creditors. 
• Fraudulent trading: Similarly, if a company takes customers' payments knowing that they will never be able to deliver the goods, this will likely be considered fraud and the court might find the director(s) personally liable, they might even face criminal charges.
• Overdrawn director’s loan account: As mentioned in the previous section, if a director fails to repay a director’s loan before the company becomes insolvent, the liquidator can demand repayment from the director personally.
• Unpaid PAYE, VAT & National Insurance (HMRC liability): If a company fails to pay VAT, PAYE, or National Insurance, and HMRC suspects deliberate non-payment, directors can be issued a Personal Liability Notice (PLN).
• Misuse of Bounce Back Loans (BBL) or government grants: During the pandemic, many businesses took out Bounce Back Loans or accessed other government schemes to maintain liquidity. However, if a director is found to have used this money for personal expenses, they might be found personally liable if the company goes insolvent.

If you’re in any of the situations listed above, or you aren’t sure about whether you are personally liable for company debt, then you should seek legal advice.
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Avoiding common company debt pitfalls

While no one goes into business expecting to be in debt, this is still a very real risk. There are steps you can take to avoid making company debt your personal problem; these include:

• Selling assets below market value: We get it, competition is rife. But knowingly undervaluing transactions might put you in a tricky situation with creditors if it comes to seeking liability for debt.
• Making preferential payments: When directors prioritise certain creditors, especially if insolvency is looming.
• Making unlawful dividend payments: Taking compensation when profits are insufficient or in breach of regulations.
• Other consequences and penalties: For example, fines, fraud or director disqualification.

Responsibilities toward HMRC and other creditors

Company directors are legally responsible for ensuring that all debt is paid. While company debt is typically exactly that– company debt, directors are still expected to behave in a legally responsible manner, otherwise, they might find themselves liable.

From corporation tax to VAT, PAYE and National Insurance, directors must ensure all tax responsibilities are met, including both filing and making payments. If keeping track of all of this information seems daunting, then bring Crunch on board to handle your financial back office, and support you to meet all tax obligations in a timely manner. Speak to Crunch about tax filing for your limited company today.
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What happens when closing a limited company with debts to HMRC?

If a limited company cannot pay its debts, the director must act in the interests of creditors, including HMRC. The main options are:

Creditors’ Voluntary Liquidation (CVL)

If the company is insolvent, the director should appoint a licensed insolvency practitioner to liquidate the company.

The directors will call a shareholders meeting to agree to liquidation, and an insolvency practitioner (IP) will be appointed as a liquidator. The liquidator sells company assets to pay creditors, including HMRC.

Any remaining debts are written off (unless directors are personally liable, for example: a director has signed a personal guarantee; or the courts find they have engaged in wrongful or fraudulent trading; or the directors are found to have taken dividends when the company was failing. 

Compulsory Liquidation (Winding Up by HMRC)

If HMRC is owed money and the company does not pay, HMRC may issue a Statutory Demand (which must be paid in 21 days). They may also file a winding-up petition in court, or obtain a winding-up order, forcing the company into liquidation.

The Official Receiver investigates directors' conduct to determine whether the director(s) are financially liable. If they deem it wrongful trading, misfeasance, or fraud, directors can be disqualified (up to 15 years) or held personally liable.
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Can sole traders and partnerships be held liable for business debts? 

In short, yes– sole traders and partnerships are personally liable for debts. This is one of the key reasons why many people choose to start a limited company over the alternatives. Registered self-employed and ready to go limited? Crunch can help with company formations and filings; get in touch today. 

Understanding limited liability company structures and debt

While a limited company structure provides separation between personal and business finances, as a director and/or shareholder, you need to be aware of situations where personal liability for company debts may arise.

Fortunately, by following best practices and avoiding personal guarantees, fraudulent trading, and unpaid taxes, you should effectively protect yourself from any personal liability for debt. 

Simply ensure you always maintain accurate financial records, fulfil tax obligations and, for specific legal concerns regarding liability, insolvency, or creditor disputes, always seek independent legal advice to protect your personal and business interests.

For expert accounting support, Crunch can help you stay on top of bookkeeping, tax filings, and supplier payments. Give us a call today.