Setting up a company will not directly impact your personal credit score. Your company will have its own credit file that is separate and unrelated to yours. However, under certain circumstances, running a company can have an adverse effect on the personal finances of directors and shareholders.
In this post, we’ll begin by explaining why limited companies have their own credit scores. Then we’ll outline the types of situations where setting up a company could indirectly affect your personal finances and credit file.
Your limited company will have its own credit score
If you set up a limited company, it will be incorporated as a legal ‘person’ with its own credit score. This means that your company will:
- exist independently of you (the shareholder and director)
- be able to enter into contracts and open business bank accounts in its own name
- have responsibility for its own assets and liabilities (debts)
- provide limited liability protection to you and any other shareholders
If your company is unable to meet its financial obligations or becomes insolvent, the defaults and insolvency will be recorded on your company’s credit file – not yours.
How your limited company may impact your personal credit score
However, there are some exceptions, whereby running a limited company can affect your personal credit score. Let’s look at the most common ones.
1. Personal guarantees
If you provide a personal guarantee for commercial leases, company loans, or other business liabilities, you would become personally responsible for these financial commitments if the company was unable to repay its debts.
This would have a significant impact on your personal finances and credit score if you were unable to make the repayments. You could end up facing bankruptcy and lose your home or other personal assets as a result.
2. Unpaid taxes
Schedule 13 of the Finance Act 2020 gives HMRC the power to transfer a company’s outstanding tax liability to directors if the company becomes insolvent and cannot pay its tax bills.
This can happen when directors are suspected of tax evasion, tax avoidance, and repeated insolvency as a way to avoid paying company taxes.
3. Wrongful trading
Wrongful trading is a civil offence that relates to the conduct of company directors. Claims of wrongful trading can be brought against a director who allows a company to continue trading when:
- the company is insolvent
- they knew, or ought to have concluded, that there was no reasonable prospect of avoiding insolvent administration or liquidation
- they failed to take every reasonable step to minimise the potential loss to creditors
If a company director is found guilty of wrongful trading, they are generally liable for the company’s debts. In severe cases, directors can be imprisoned.
4. Fraudulent trading
Fraudulent trading is even more serious than wrongful trading. It’s a criminal offence based on intent to deceive and defraud creditors and customers whilst knowing that the company is going into liquidation. Examples include:
- attempting to maximise the company’s income
- disposing of company assets for less than they are worth
- continuing to accept supplier credit
- borrowing more money in the company name
- continuing to take money from customers whilst knowing that orders cannot be fulfilled
If a director is found guilty of fraudulent trading, they may be fined, held personally liable for a substantial proportion of company debts, and even sent to prison.
5. Company insolvency
If your company fails to make a profit and is unable to meet its financial obligations, it will become insolvent and enter into administration or liquidation.
As a shareholder and director, you have limited liability for company debts. This means that you only risk losing the money you’ve invested in the business, e.g. paying for shares, startup funds, etc.
However, company insolvency could have a knock-on effect on your personal finances and credit score if you don’t have other sources of income and you’re unable to meet your own financial commitments as a result of losing the business.
Final thoughts…
Limited liability protection is one of the biggest benefits of company formation. As long as you trade responsibly and legally, setting up a company will have no direct impact on your personal credit score.
Hopefully, this post has given you a better understanding of the topic at hand – why limited companies have their own credit files, and the situations were running a company could indirectly affect your personal finances and credit score.
If you have any questions or need help setting up a company, please contact our team of company formation experts or leave a comment below.
