Personal Liabilities of Business Owners
A common misunderstanding in business is that business owners or directors are liable for all of the debts of the business. As a general rule, business owners and directors are not liable for the debts of the business unless an exception applies. The exceptions depend on the structure of your business, whether any personal guarantees are signed and whether certain legal obligations have been breached.
If you are registered as a sole trader, your liability is “unlimited”. This means that you are liable for all the debts and tax obligations of your business. As there is no division between “business” assets and “personal” assets, your personal assets can be used to pay business debts.
This means that if legal proceedings are issued to recover a debt and judgment is entered into against the business, your personal assets, such as your house, may be seized and sold to pay the judgment debt.
If your business is registered as a company, your liability is “limited”. Your liability is limited because the company is a separate legal entity which is liable for its own debts. However, there are circumstances where you may be personally liable for the debts of your company, including –
- Personal Guarantees and Charges
You may have entered into an agreement to personally guarantee a loan for your company. Where such an agreement exists, you will be personally liable for the repayment of your company’s loan and your assets can be realised to pay the company debt.
Rather than have a wide personal guarantee, there may be a limited charge clause which restricts the mode of recovery of the debt to a specific asset. The most common charge clause will allow the other side to lodge a caveat on the certificate of title of a property, commonly the director of the company’s home. The caveat may prohibit the director from selling the property or further using the home as security on a loan. Should the company then be unable to pay the debt, the director may sell their home and pay the debt from the proceeds of sale.
- Tax and Superannuation
As a director, you are responsible for ensuring your company meets its tax and superannuation obligations. Should your company fail to meet these obligations, you may become personally liable for outstanding obligations such as GST, Pay As You Go (PAYG) withholding and Superannuation Guarantee Charge (SGC). If this occurs, the Australian Taxation Office may issue a director penalty notice which will seek an amount equivalent to the company’s unpaid liabilities.
- Directors’ Duties
As a director, you owe duties to your company under the Corporations Act 2001 (Cth). These include a duty to act in good faith, a duty to act in the best interests of the company, and a duty to not trade while insolvent. If you breach any of your directors duties (for example, by allowing your company to continue to trade when it cannot pay its debts when they are due) you may be personally liable for any loss or damage incurred by your company or others.
- Workplace Obligations
As an employer, you have obligations under the Fair Work Act 2009 (Cth), including an obligation to pay your employees proper wages and a duty to provide and maintain a working environment that is safe and free of risks to health. If you fail to meet these obligations (for example, by paying an employee less than the amount stipulated in a modern award) you may be personally liable for loss or harm suffered by your employee.
To ensure you are aware of your responsibilities and do not become personally liable for your company’s debts, you should:
- Ensure you structure your business appropriately and understand your scope of liability within that structure.
- Seek independent legal advice before entering into any loan agreements or personal guarantees.
- Be informed of the duties you owe to your company, and only take actions which are consistent with those duties.
- If there are multiple directors of your company, ensure the responsibilities of each director is clear and in writing. For instance, in a personal guarantee, be aware whether the guarantee relates to all or just one director.
You can also see our YouTube video on managing a business dispute here – https://www.youtube.com/watch?v=RpUTnArM6pI.
If you need assistance or advice regarding your liability for business debts, please contact an experienced commercial lawyer team member at Taurus Legal Management on (03) 9481 2000 or at email@example.com.