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The Implications Of Company Structure On Debt Collection

Updated: Jan 31



This article aims to explore the different types of companies that exist in the UK and discuss the implications of each of the different structures for the debt collection industry. It will consider the advantages and disadvantages of the options available to business owners from their perspective but then also from the perspective of professionals within the industry who may be working for, or against these different setups.


According to Companies House, there are 4 main different ways to structure a company when becoming self-employed. These are “Sole trader”, “Partnership”, “Limited Liability Partnership (LLP)”, “Limited Liability Company (Ltd)”. Each of the different options above represents a different legal structure and also give different advantages and disadvantages to the owner of the company depending on the structure chosen. A further look at those differences follows below.


A “Sole trader” is someone who is considered to be self-employed as opposed to being employed for the benefit of registering with Her Majesty’s Revenue and Customs (HMRC) for tax and national insurance purposes. However, the tax threshold and national insurance contributions will be the same as a personal tax allowance which applies to people who are also employed by other businesses. The current personal tax allowance is £12,570.00. In addition to this, Sole traders will still be allowed to employ people in the same way that other kinds of self-employed people are.


Setting up a company as a Sole trader is often an attractive option to many start-up businesses due to the low initial financial costs involved, and the level of control that is maintained as a business owner by setting up in this way. For example, a Sole trader is not required to make their company accounts publicly available on Companies House and has fewer other compliance obligations required of them as opposed to the other kinds of company structures that will be discussed below.


Yet, one of the biggest disadvantages to setting up a company this way as a business owner is that the liability for any debt incurred by the business is not limited by a legal distinction between the business owner and their business as a separate legal entity. Therefore, a business owner operating as a Sole trader will be 100% personally liable for all debts owed by the business. This could be highly risky for businesses that rely on debt capital to fund the start-up of their business.


For a debt collection company working with a debtor that is operating as a Sole trader, it means that if it, unfortunately, got to the point where a winding-up petition was being considered then it would also be able to look to the Sole trader or partners themselves to become ‘contributories’ to the liquidation process which could ultimately result in personal bankruptcy. However, UK corporate insolvency legislation dictates that a winding-up petition against a Sole trader can only happen unless the debt owed is greater than £5,000.00.


However, some downsides to the debt recovery of a Sole trader are that they will not have their company accounts publicly available for viewing on the Companies House database and there could be GDPR implications for running a credit report on an individual unless express consent has been provided. So, if you are at the point of considering a winding-up petition against a Sole trader then it is unlikely that you will obtain their consent to run a credit report on them. These factors make it difficult to establish how likely it is that you can successfully recover the money through legal action.


When we referred to “partners” above we simply meant a combination of one or more Sole traders, which then becomes known as a Partnership who had decided to work together on one business, as partners, so all the above information is just as relevant to partners in that context as it is a Sole trader. However, there is another legally recognised company structure wherein the words “Partners” are used that does involve a quite different approach to doing business and that is in the case of the Limited Liability Partnership, or LLP for short.


An LLP is similar in principle to a Limited liability company, wherein its “members” are limited to their liability to pay for the company’s debts. The limit of the liability is written up in a contract and is usually proportionate to the level of investment the partner has made to become a partner of the company. This model is the dominant model in the legal sector for example where law firms will nearly always adopt an LLP company structure. However, despite having limited liability Partners within LLP’s are still considered self-employed for tax purposes and must take responsibility for ensuring that they pay their tax on their share of the profits from the partnership.


Having said that, from a debt collection point of view, it can be slightly easier to make some initial enquiries into a debtor that is set up as an LLP since they must also register with Companies House and must also submit their accounts to Companies House too. This information can be highly useful for gaining an insight into a company’s financial performance, particularly if the debtor is a medium or large enterprise since they must submit a more detailed set of accounts compared to small or micro entities who only have to submit abridged accounts.


Yet, as a partnership, an LLP is still considered a data subject when it comes to obtaining a credit report on them so this information should be being obtained without the consent of the company beforehand. Although the threshold for being able to submit a winding-up petition is a lot lower, at £750.00. Having said that there is a series of steps that all creditors will expect to have taken before a winding-up petition will be accepted by a court, and this is known as a pre-action protocol. Further details of that can be found here.


Then finally there is the Limited liability company (Ltd). A limited liability company is a separate legal entity to the people that run it (known as Director’s) and own it (known as Shareholder’s). A limited company means, as with an LLP, that its shareholders, rather than members, are limited in terms of the liability they owe to its creditors by the value of the investment that was paid for their share in the business. Sometimes the Shareholders may be different people to the Directors but often they are the same people too.


The disadvantages of incorporating a limited company are that there are set up costs involved to do it, which are payable to Companies House and there is also some preparation work that needs to be done with HMRC in order be set up for corporation tax deductions and VAT and PAYE if applicable too. On top of that, there are more obligations bestowed upon company directors of limited companies in terms of reporting requirements to Companies House as they are required to submit company account each year (assuming they are trading) and also an annual return.


Yet it is often the preferred method for larger organisations who enjoy the benefits of having limited liability and financial exposure due to being legally separated from the company itself. This has implications for debt collectors dealing with limited companies who are pursuing recovery of a debt that they feel is affordable despite being told by the debtor that it is not. A distinction must be taken into consideration between the Directors and Shareholders personal financial circumstances and the company’s financial affairs. Still, it can be easier to take preventative measures to avoid problems with not being paid beforehand by running a credit report on a company or asking for trade references from fellow suppliers before doing work with them.


Another potential complication with limited companies is the use of other companies who act as shareholders of other companies. There are many reasons for this in the UK. Some simply parent companies of subsidiary businesses and are part of a group of companies who choose to structure themselves that way for all manner of reasons. Some companies exist simply to act as formation companies who will form companies on behalf of somebody else who would prefer not to have their personal information made public.


Regardless of the company type, when it comes to credit risk, it pays to take steps to try and mitigate the potential risks before becoming exposed to them rather than after. If you are interested in knowing more about ways to do that then get in touch for a free no-obligation discussion at www.jspcreditmanagement.co.uk or contact us on 01827 66820 to discuss your needs.

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