Who is liable for business debts?

Sole trader

You are personally liable for any financial issues related to the business and solely responsible for any tax the business must pay.

Any debts or liabilities incurred by the business will ultimately have to be dealt with from your own pocket. There is no division between business assets or personal assets, which includes your share of any assets jointly owned with another person (such as co-owning your house or car with your partner).

Your liability is unlimited, which means personal assets in your name can be used to pay business debts - so if your business goes into debt, your house could potentially be used to pay off the debt.

Company

Generally speaking, if you comply with all of your legal obligations as a director of a company, the company is liable for the company's debts. This means debts or liabilities of the company will be paid by the company, not you as a director. However, there are some exceptions, so please read the information below carefully to ensure you fully understand your responsibilities as a director. If you have questions about your obligations or responsibilities seek professional advice from a lawyer, accountant or search Advisory Services.

Breach of directors' duties:

However, if you breach your duties as a director, for example, you:

  • fail to act in good faith
  • fail to act in in the best interests of the company
  • allow the company to continue to trade whilst insolvent (i.e. unable to pay its debts)

then regulatory action can be taken against you personally (for criminal offences or civil action under the Corporations Act 2001). You can also be ordered by a Court to pay compensation to the company or the creditor.

Pay As You Go (PAYG) and Super Guarantee Charge (SGC)

As a director, you are personally liable for unpaid PAYG withholding and SGC.

If you are a director (or are about to become a director) of a company, you should find out if there are any unpaid and unreported PAYG withholding or SGC amounts. If the company has a PAYG or SGC debt, the Commissioner of Taxation may issue you with a director penalty notice (DPN) as a warning. If the company doesn't take appropriate steps within 21 days to pay the debt, the Commissioner can take action against you personally to recover the debt amount. If you receive a DPN you should immediately seek professional advice.

Other potential liabilities

Banks often require company directors to be guarantors against business loans.

It's also important to understand that as a director, you may still be responsible for your conduct during the period you held that position, even after you have resigned from the role.

More information...

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