Understanding Your Financial Accountability as a Small Business Director
Operating a small business comes with its own set of unique challenges. One area often overlooked is the potential financial liability posed on company directors. This article aims to provide a comprehensive guide on how financially liable you are as the director of a small business.
The Financial Landscape for Small Business Directors
Small businesses often go through cycles of lean cash flow, leading to tough decisions on prioritizing payments. During these periods, impending liabilities linked to the directors may be unintentionally overlooked. It’s crucial for directors to understand their potential financial obligations to protect themselves effectively.
Employee Payroll Deductions
Employee source deductions, such as income tax, employment insurance, and pension plan contributions, take precedence over other company liabilities. If the company fails to fulfill these obligations, the government can hold the directors personally liable.
Unpaid Wages and Holiday Pay
There may be instances where businesses, due to cash flow issues, are unable to pay their employees promptly. Unpaid wages and vacation pay can pile up, leading to potential claims against the company directors.
Commodity Taxes
When businesses provide goods or services, they must charge and collect taxes, such as the Goods and Services Tax (GST). Should a company fail to remit these taxes due to limited cash flow, the directors may be held accountable for these unpaid dues.
The Perils of Personal Guarantees
In their quest for financing, businesses often provide guarantees to secure loans. However, directors may not realize that these guarantees can lead to personal financial obligations if the business falls into insolvency.
Landlord Guarantees
Small businesses, seen as risky tenants, often have to provide guarantees to landlords. Should the company default on its lease payments, the guarantors can be held responsible for the outstanding lease term.
The Risk of Director Liability
Directors must understand that they may be called upon to fulfill unpaid company obligations if the business’s cash flow is insufficient. All directors are jointly and severally liable, meaning a single director could potentially be held responsible for paying off the entire debt.
Navigating Financial Responsibility
If a small business fails and the directors are unable to meet the listed obligations, these unpaid amounts become personal unsecured debts. These debts are then classified along with personal loans and credit card debts.
Seeking Professional Guidance
If your small business is facing any of the above liabilities, it’s time to seek professional advice. Licensed Insolvency Trustees can guide you on managing these claims and their potential impact on your personal finances.
Dealing with Bankruptcy
In the unfortunate event of a small business filing for bankruptcy, the above debts do not vanish. Instead, they transform into claims against the company’s directors. Options such as filing a Consumer Proposal or personal bankruptcy may be considered in such scenarios.
Concluding Thoughts
Being a small business director comes with significant responsibilities. It’s in your best interest as a director to ensure that the company meets its obligations promptly. Remember, ignorance is not always bliss. Staying informed and proactive is the best way to safeguard your financial future.
