Legal insight: Are sole traders personally liable for debts?

What is a sole trader and how does liability work?

A sole trader is someone who operates a business as an individual, either with or without a trading name (or ‘business name’). In other words, a sole trader business is the same as being self-employed. It’s the most common type of business structure.

Legally speaking, there’s no distinction between you and your business because you are the business. That means all business profits are yours, but so are all the risks and responsibilities.

Can a sole trader be sued?

Yes, like any business, a sole trader or private person can be sued in certain circumstances.

Since the law doesn’t separate you from your business, if something goes wrong (eg a legal dispute, negligence claim, or breach of contract), you can have legal action taken against you personally. Any court judgments will be made against you as an individual, not just the business.

Are sole traders personally liable for business debts?

Yes, and this is the most important thing to understand before choosing this business structure. As a sole trader, you have unlimited personal liability. If your business owes money, you are personally responsible for paying it back, even if your business stops trading.

What happens if a sole trader can’t pay their debts?

If you're unable to pay what your business owes, creditors can pursue your personal assets. This could involve:

• court action and County Court Judgments (CCJs)

• bailiff enforcement

• damage to your credit score

• bankruptcy (in extreme cases)

There is no financial protection between you and your business, so even your savings, car, home, or jointly owned assets could be at risk.

How to protect yourself as a sole trader

While you can’t completely avoid liability as a sole trader, you can take steps to reduce your personal exposure:

1. Take out business insurance

Although insurance won’t protect you from all debts, it can cover specific claims. Useful types of business insurance include:

• public liability insurance – for injury or property damage claims

• professional indemnity insurance – for professional errors or advice gone wrong

• employers’ liability insurance – a legal requirement if you employ staff

For more information, read Business insurance.

2. Separate your finances

Set up a business bank account to organise your finances and keep a clear record of income and expenses. This will not protect you legally, but it is essential for managing your business well and avoiding unintentional financial mistakes.

3. Avoid over-borrowing

Many lenders require personal guarantees (ie a legally binding promise to repay a business debt) when issuing credit to sole traders. Be cautious before borrowing or signing agreements that could leave you personally exposed if things go wrong.

4. Build a financial buffer

Keep a reserve of cash or savings in the business to help cover emergencies, tax bills, or quiet periods. This can help you stay afloat without relying on credit or falling behind on payments.

5. Get professional advice

As your business grows or becomes more complex, it’s worth speaking to a lawyer or accountant. They can help you understand your obligations and advise on whether a different structure would be safer. You can easily Ask a lawyer about any legal questions you may have.

Is it better to be a sole trader or a limited company?

One way to significantly reduce your personal liability is to operate through a private limited company (Ltd). This is the second most common business structure in the UK and involves setting up a company, which is treated as a separate legal entity in the eyes of the law.

As a sole trader, you are personally responsible for everything your business owes. That’s fine when you’re starting small or have limited exposure, but as your business grows, so do the risks due to larger contracts, bigger loans, more customers, and possibly employees. These all increase the chances of something going wrong.

Switching to (or starting operations as) a limited company creates a legal separation between you and your business. It adds more paperwork and compliance requirements, but also offers more protection, credibility, and potential tax advantages.

Sole trader vs limited company 

Whether it’s better to be a sole trader or a limited company depends on your situation. Many people start as sole traders for simplicity, then move to a limited company once their business becomes more financially risky or profitable. For example, if you're a freelancer working with a few low-risk clients, staying as a sole trader might be just fine. But if you're taking on larger contracts, hiring staff, or seeking investment, a limited company may be a safer and more strategic choice.

The key differences between these two business structures include:

If you’re concerned about personal liability or want to protect your assets, operating as a limited company may be the safer route, especially if you're scaling your operations or taking on debt.

You can register your company using our Business registration service. Not only will one of our Legal Pros handle your registration for you, but your first registration is free if you’re a Rocket Legal+ member!

For more information, read Choosing your business structure and Private limited companies and do not hesitate to Ask a lawyer if you have any questions.

TL;DR

What you need to know from this insight:

1. a sole trader is a business structure where the individual and business are considered the same legal entity

2. a sole trader can be personally sued as a result of any business actions or personally responsible (liable) for paying any business debts

3. sole traders can take steps to protect their business, such as taking out business insurance, avoiding over-borrowing, building in a financial business buffer and getting professional help

4. a sole trader is a good business model for smaller businesses that have less legal risk to manage

5. it may be a good consideration to convert into a private limited company (Ltd) if you’re seeking investment or taking on larger contracts, which are more legally risky

6. a private limited company can provide better protection against business risks and losses as it is considered its own legal entity, separate from its shareholders