Navigating financial challenges: Personal debt vs. company debt

Business owners must understand the distinction between personal and corporate debt. 

A mistake could be costly, with the potential to be held personally liable for company debts. Seek professional advice early to effectively navigate financial difficulties.

One of the biggest nightmares for any business owner is becoming insolvent, but it doesn’t have to be. Understanding the key differences between personal debt and company debt is crucial in your decision making. Your business structure affects how you can navigate through a difficult financial scenario and what measures you can take to mitigate its impact.

Here are some answers to commonly asked questions.

What is the difference between a company’s debts and personal debts?

Companies are a separate legal entity from their director(s), which essentially separates the liabilities (and assets) of a company from those of its directors. This means that, in most cases, the debts of a business do not automatically transfer to the individuals involved. 

A company is responsible for its own debts. These debts don’t automatically transfer to the individual, whether that’s the director of the company or its shareholders. In most cases, the corporate veil cannot be lifted unless by a Court or statute.

When might a business owner be held personally liable for a company’s debts?

Typically, the director(s) of a company are not personally liable for the company's debts, because they are separate legal entities. However, there are cases when this happens and the director is held liable for the company’s debts. The most common example is when the director of a company has given a personal guarantee.

Let’s say, for instance, you run a carpentry business. You need to buy supplies so you open a credit account with a supplier, for example, Bunnings. As part of their credit policies, Bunnings might request a personal guarantee from the director. This means, should the company be unable to pay its own debts, Bunnings can reach beyond the corporate entity and demand payment from the director directly.

How important is it to seek advice when facing potential company and personal insolvency?

Many business owners feel like they have to struggle through their financial challenges alone. However, this is not the case. If you face financial trouble, it’s important to seek professional guidance as soon as possible.

It doesn't always have to be legal advice, but it needs to be from an expert. Far too many people turn to ‘Dr. Google.’ This can lead you into a rabbit hole of misinformation because online sources don’t consider your unique circumstances. A professional, whether it's a lawyer or an insolvency specialist, can give you a clear and personalised understanding of your situation.

What are the main qualities people should look for in an insolvency specialist?

Insolvency is a sensitive subject to talk about. You have to disclose detailed personal and financial information. So, it’s important to be sure the expert you speak with is trustworthy and has your best interests at heart. When seeking professional advice, make sure it’s from someone who is:

• Qualified: There are a lot of people out there who claim they have the experience, yet don’t have the required qualifications. Our strongest recommendation is to seek advice from an ASIC registered liquidator for companies. And for personal insolvency, an AFSA registered  bankruptcy trustee.
• Experienced: Every sector is different, so it’s best if you find someone with a breadth of experience in the industry that you operate in. That way, they’ll understand the specific challenges your business faces.
• Reputable:Don’t just contact the first person you find. Do your research. Make sure they have a good reputation in the marketplace.

If you do run into financial troubles, what should you do?

One major takeaway is to be proactive. Keep thorough records, especially of any personal guarantees. This means you can make informed decisions early on, rather than scrambling when trouble hits. Early professional advice can be a game-changer, helping you navigate through potential financial pitfalls before they escalate.

Need advice navigating business debt? Contact us for a free initial discussion so you can make the most informed decision moving forward.

If you or anyone you know is experiencing financial distress and needs mental health support, please contact:

• Lifeline on 13 11 14
• Beyond Blue on 1300 224 636
• Headspace on 1800 650 890