Being a sole trader is the simplest way to run a business. Keeping records and accounts is very simple, plus you get to keep all of your profits. However as a sole trader you are personally liable for any debts that your business runs up.
As with any business, sole traders also have a responsibility to their creditors. If you are a sole trader and you are insolvent or approaching insolvency you need to take action immediately.
Sole Trader Insolvency Options
There are two options for insolvent sole traders:
Individual Voluntary Arrangement (IVA)
This is when a schedule of repayments is agreed by 75% of the creditors, the agreement is usually drawn up by an insolvency practitioner. Using this process the business can continue to trade, however failure to comply with the terms and make the repayments could result in a petition for bankruptcy being lodged.
A trader can declare bankruptcy when a creditor pursues them through the courts for debts over £750. The trader needs to be issued with a County Court Judgement for the debt, followed by a Statutory Demand, once this remains unpaid for 21 days the creditor can lodge a petition for bankruptcy. Once declared Bankrupt an insolvency practitioner takes control of the trader’s assets and uses them to settle the debts. Bankruptcy is a complex process and is usually only used as a last resort.