Setting up and running your own business is a risky undertaking. What happens if sales reduce or disappear, and you are left with unpaid costs or loans and no cashflow?
The experience of recent COVID lockdown challenges – aside from the risk to personal health – has resulted in business closures at an unprecedented rate.
So how can businesses manage these risks?
Business structure
Sole traders and partnerships (aside from LLPs – see note below) have no limitation of liability. If creditors (including banks) cannot recover unpaid debts from net business assets, then they can pursue claims against the personal assets of the sole trader or individual partners. This can include a family home.
One way to avoid this risk is to set-up or convert the business structure. There are two ways to do this.
Limited Liability Partnerships (LLPs)
It is possible to retain a self-employed status by converting a sole-trader or ordinary business partnership into an LLP structure. This would protect active partners from any claim against their personal assets in the event that the business became insolvent.
Limited company (Ltd)
The other option is to fully incorporate a self-employed business by transferring the business to a Ltd structure.
Unless directors offer creditors, a personal guarantee or can be proved to be acting fraudulently, the company’s creditors would only have access to business not personal assets.
Insurance
Self-employed and incorporated business can also insure against certain risks. They are risks associated with theft, damage to assets or claims against the business for losses experienced by third-parties.
Care should be taken if a self-employed person or partnership (not an LLP) relies on insurance to cover these risks.
Underwriters of insurance companies have a history of challenging claims based on the exclusions set out in policy small print.
Planning is your best option
Please contact us if you feel exposed to commercial risks and want to consider your options.