Jasmine Birtles
Your money-making expert. Financial journalist, TV and radio personality.
Differences between business and personal debt
Moneymagpie Team
14th Aug 2026
No one starts a business thinking about how it might end.
You might begin with a weekend side hustle, a freelance service, an online shop or a small limited company. At first, the risks can feel manageable. There are invoices to chase, stock to buy, software subscriptions to pay for and a small loan or credit card balance to keep things moving.
But if the business stops making enough money, one question can become very personal very quickly.
If the business fails, do you still owe the money?
The answer depends on how the business was set up, what debts were taken on, and whether you personally guaranteed any of them.
According to the latest Insolvency Service company insolvency figures, there were 1,868 registered company insolvencies in England and Wales in May 2026. Most were Creditors’ Voluntary Liquidations, where directors choose to close an insolvent company formally.
Clarke Bell, the insolvency firm, says many small business owners do not realise the difference between business debt and personal debt until the company is already under pressure.
John Bell, Senior Partner and Licensed Insolvency Practitioner at Clarke Bell, said: “The biggest misconception is that all business debt works in the same way. It does not. A sole trader, a limited company director and someone who has signed a personal guarantee can all be in very different positions”
- Sole Trader? The Debt Is Usually Yours
- Limited Company? The Company Usually Owes the Money
- Personal Guarantees Can Change Everything
- Tax Debts Need Careful Handling
- What If You Took Money Out of the Company?
- What Should You Do If the Business Is Struggling?
- So, Do You Still Owe the Money?
Sole Trader? The Debt Is Usually Yours
If you are a sole trader, there is no separate legal line between you and the business.
That can make things simple when the business is going well. You keep the profits after tax, make the decisions and have less admin than a limited company.
But it also means you are personally responsible for the business debts.
GOV.UK says sole traders have “unlimited liability”, meaning owners are personally responsible for all the business’s debts.
So if your freelance work dries up, your small shop closes, or your side hustle cannot cover its costs, the money owed does not disappear with the business. Creditors can still pursue you personally.
This can include supplier debts, tax bills, unpaid rent, business loans, credit cards and overdrafts taken out in your own name.
Limited Company? The Company Usually Owes the Money
A limited company is different.
It is a separate legal entity. In simple terms, the company owns its money, owes its debts and enters into contracts in its own name.
That is one reason people move from a sole trader to a limited company as their business grows. It can create a clearer boundary between personal and business finances.
In many cases, if a limited company fails, its debts remain with the company. Directors and shareholders are not automatically personally liable just because the business has gone under.
That is the basic idea behind limited liability.
But there are important exceptions.
Clarke Bell says directors can still face personal financial risk if they have signed a personal guarantee, taken money out of the company improperly, continued trading when the company was insolvent, or failed to meet their duties as directors.
Bell said: “Limited liability is real, but it is not a free pass. Directors still have responsibilities, especially once the company is in financial difficulty.”
Personal Guarantees Can Change Everything
A personal guarantee is one of the most common ways a business debt can become a personal problem.
This is where a director or business owner agrees to personally repay a debt if the company cannot. It is often used for business loans, commercial leases, supplier credit, vehicle finance or other forms of borrowing.
GOV.UK guidance states that a personal guarantee is a legally binding agreement in which a director will personally repay a debt if the company fails to meet its financial obligations.
That means a limited company may close, but the guarantee can still survive.
For example, if your company borrowed £30,000 and you personally guaranteed the loan, the lender may be able to pursue you for the unpaid amount if the company cannot pay.
This is why directors should be careful before signing any agreement that uses the words “personal guarantee”, “indemnity” or “joint and several liability”.
Tax Debts Need Careful Handling
Tax debt is another area where directors should act early.
A company may fall behind with VAT, PAYE, Corporation Tax or National Insurance. For a while, directors may hope to catch up once cash flow improves.
But HMRC debt can escalate quickly.
The debt may belong to the company, but directors still have duties once the company is struggling. They should avoid using tax money to keep trading without a realistic plan, and they should be careful not to pay some creditors while ignoring others.
When a company becomes insolvent, directors’ priorities shift from shareholders to creditors. Directors must protect company assets, treat creditors fairly, and ensure the company does not worsen the financial position of creditors.
This does not mean every director of a failed company has done something wrong. Many businesses fail because of late payments, rising costs, quiet trading periods, or customers not paying on time.
The issue is what directors do once they know the business is in trouble.
What If You Took Money Out of the Company?
Some directors also get into difficulty because of how money has moved between them and the company.
This could include dividends paid when profits were insufficient, an overdrawn director’s loan account, or money taken out of the company when creditors were already unpaid.
These issues can be reviewed if the company later enters liquidation.
For small business owners, this can feel confusing because the company’s money may not feel separate from personal money in day-to-day life. But legally, it is.
That is why it is important to keep proper records and speak to an accountant or insolvency practitioner if the company can no longer pay its debts.
What Should You Do If the Business Is Struggling?
The first step is to work out what type of debt you have.
Is it personal debt? Sole trader debt? Limited company debt? A personally guaranteed company debt? Tax debt? Money owed to suppliers? A director’s loan issue?
The second step is to stop guessing.
Bell said, “The worst thing directors can do is ignore the problem because they are afraid of what the answer might be. Getting advice does not automatically mean the business has to close. It means understanding the options before creditors force the issue.”
Those options may include negotiating payment terms, reducing costs, restructuring the business, voluntarily closing the company, or entering a formal liquidation process.
For limited company directors, a Creditors’ Voluntary Liquidation can sometimes offer a more orderly way to close a company that cannot pay its debts. Clarke Bell explains that a CVL is a formal process used to close a company that can no longer pay its debts, initiated by directors and managed by a licensed insolvency practitioner.
The important point is timing.
The earlier you understand your position, the more control you usually have.
So, Do You Still Owe the Money?
Sometimes, yes.
If you are a sole trader, you are usually personally responsible for the business debts. If you signed a personal guarantee, you may still owe that debt even if your limited company closes. If you withdrew funds from the company incorrectly, there may be consequences.
But if the debt belongs solely to a limited company and there has been no personal guarantee or director misconduct, the liability will often remain with the company.
That is why the answer is not simply “yes” or “no”.
It depends on the business structure, the type of debt and the decisions made before the business failed.
For anyone running a side hustle, freelance business or limited company, the lesson is simple: know where the risk sits before things go wrong.
Because when a business fails, the money question is not just what the business owes.
It is whether you owe it too.
Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.
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