Closing a sole trader business

June 25, 2024

At BRI Business Recovery and Insolvency, we can provide help and advice on all areas of business insolvency. In this insight, we will focus on closing a sole trader business. If this is affecting your business and you are looking for support, please contact us. 

Closing a sole trader business as an Insolvent sole trader

If you have been running a business as a sole trader and are now looking to close it down due to insolvency, i.e., the liabilities are greater than the assets (balance sheet test), or you can no longer pay the bills as they fall due (cashflow test) there are a few options open to you.

Options for closing a sole trader business

The formal and informal options for dealing with insolvency that are available when closing a sole trader business are essentially the same as those available to all individuals who are facing financial difficulty.

These include but are not limited to

  • Negotiating with creditors,
  • Additional lending,
  • Debt management plans,
  • Bankruptcy,
  • Debt Relief Orders
  • Individual Voluntary Arrangements (IVA).

Limitations of solutions you may face

If the business is not incorporated and, therefore, not a limited company, then corporate insolvency options are unlikely to be available. This means that procedures that involve the debts staying with the business and not being personal liabilities—such procedures include liquidation, administration, receivership, or a restructuring plan—are not available.

Closing a sole trader business: How we help our clients  

A recent enquiry into our offices came from a lady who had run a small business which unfortunately had not been making enough profit for her to take a salary. The situation became even worse when she started to struggle with making loan repayments, and a dispute with the gas supplier left her with bills she simply could not pay.

Finding the right solutions for closing a sole trader business

The sole trader business owner called our offices seeking advice on how she could put forward an IVA to her creditors. At this point, our first response was a very simple and straightforward question: is this the right solution for you?

After taking the time to learn about the client’s business and current circumstances, it soon became apparent that an IVA would involve a former sole trader, who was no longer in any form of employment, using an element of her benefits to make contributions towards repaying debts accrued while she was trading. This would involve her doing so for the full standard IVA term (at least 5 years).

Given the circumstances outlined above, it was clear that options other than an IVA were also available to the client, including a debt management plan and, possibly more appropriately, a debt relief order (DRO) – this procedure, for which any eligible individual can apply on-line with no fee being payable, is similar to a bankruptcy procedure in that all of the debts of the individual as at the date of the DRO stay with it.

The eligibility for a DRO is defined here, but essentially, it is a sort of ‘Bankruptcy lite’ for individuals with a relatively small amount of debt who do not own their own home and have little income or assets.

The Right Outcome

Upon understanding what a DRO was and how it could be obtained, despite the disadvantages to the procedure, such as the impact on her credit rating, the client recognised this was the best option. They were greatly relieved that the team at BRI had talked through the options and explained clearly what they meant.

If you or a client need assistance when it comes to closing a sole trader business or any other financial difficulty being faced, please do not hesitate to contact one of our offices for a free and confidential initial consultation.