If you are a sole trader, or in a basic partnership, and if your business gets into financial difficulties, any liabilities that cannot be covered by the disposal of business assets may have to be settled out of personal assets.
In accountancy speak, you have unlimited liability; there is no protection for your personal assets.
You have options.
Limited Liability Suggestions
The Office for Tax Simplification has suggested the idea that sole traders can elect for a form of limited liability status. This will allow them to protect their homes from any claim by business creditors. At present, this is pure conjecture. Mr Hammond may introduce this option in the forthcoming Budget later this year, we will have to wait and see.
Alternatively, sole traders – or those in an unlimited partnership – could form a Limited Liability Partnership (LLP), but in the case of sole traders, they would need a partner to do this.
Finally, sole traders or those in a partnership could incorporate their business, convert to a Limited Company status.
The last two options will create additional compliance costs: LLP and Limited Company accounts have to be drawn up in a statutory format and filed at Companies House and tax planning will need to be reconsidered.
It has always been the case that highly profitable businesses, and businesses where commercial risks cannot be adequately covered by insurance, should consider a form of incorporated status: LLP or Limited Company. Now that the outlook is being clouded by the Brexit issue, the self-employed may like to reconsider their options.
It may well be that what has served you well in the past will do so in the future, but we recommend that you take time out to reassess your risks, just in case there is an argument for change. See our Tax Planning page to find out how Bracey’s can help.