Business and personal finances should never be mixed with each other, but it is not so easy when one owns a small business. If you have a debt that is not related to your business, but is entirely personal, it can still affect your business depending on the circumstances you are dealing with.
When does it not affect your business?
If the company, you own is a limited company then you become an employee while holding the title of managing director (MD) or chief executive officer (CEO). Here, your business finance and personal finance are separated by far. Therefore, your personal debts do not affect your business.
Although, to those who you owe your money/ creditors can stir up some trouble by threatening to target your business for your personal debts. Also, make a claim to recover their debt against your business. This cannot happen if you have a limited company, which you are working for as an employee. Therefore, your business cannot be affected by your personal debts.
When does it affect your business?
Debt is like a two-way street that you cannot cross without looking both ways. In simple terms, how you deal with your personal debt can have a direct effect on your enterprise.
Your business finances and personal finance are not separated from each other if you are a sole trader. From a legal point of view, you and your business are one entity. That means whatever debts you have, business or personal, must be paid by you. Creditors have the legal right to act against you and your business.
If you are in a business partnership with two or more people, that business is also considered as one legal entity. With this creditor can claim your business to recover from the debt, but there are several exceptions regarding the partnership.
If someone joins your business as a partner, and there is a debt that exists before the person signs up for the partnership, they are not liable for any of those debts. Unless there is an agreement that states otherwise, they are not liable for any of your debts before they came in the picture.
Similarly, if your partner leaves his partnership while your business is still in debt, they are still liable for the pre-existing debts unless there is an agreement that states otherwise. This is because partners in business must put the interests of the business over their own interests and what is better for the other partner. Any action they take either professionally or for personal interest is liable for all the partners (if there are more than two).
Don’t worry about your personal debts affecting your business too much!
The good news is that personal debt will very rarely have an impact on your limited company. But this doesn’t mean you shouldn’t do everything in your power to reduce or repay your debt and to start with a clean slate.
Do you think you aren’t able to handle your debts yourself? Don’t worry! There is always some help available through your bank or a financial service so you or your business do not have to suffer alone.
