Q. I’m thinking of setting up a business, but what would happen if it all went wrong? Will I be declared bankrupt?

A.The best way to protect yourself is to set up as a limited company right from the start, says Tim Carter, head of insolvency at law firm Stevens & Bolton. By doing this you ensure that you have limited liability in case your business fails leaving creditors with unpaid debts. So, if your business does collapse and creditors are owed £50,000 they can only be paid through the sale of assets belonging to the company. This compares with setting up as a sole trader. If you choose to be a one-man-band then you are held responsible for any debts owed to creditors if your business collapses. That means you could lose your house, car or any other assets registered in your name. Even if you are a one-man-band it’s worth setting up as a limited company says Carter, since all you are liable to lose is your initial capital.

Q. So, if a company does go bust, is the law supportive?

A.Very, says Tim Carter, compared to other countries. The Enterprise Acts of 2007 and 2008 streamlined the UK’s insolvency procedures. There are now three insolvency procedures for a limited company. The first is a Company Voluntary Agreement, which is a good option for a company that is struggling. This allows a company to enter into a voluntary arrangement with the creditors, whereby they receive less than they are owed in order to keep the company in business. The second is administration. In this scenario, an insolvent company can be sold as a going concern. This means that the business never stops trading thereby protecting its name. The third is a liquidation which will be the end of the business. The logic behind having multiple insolvency procedures is that it ensures that attempts are made to allow a viable business to survive. “This streamlined administration process encourages entrepreneurialism and innovation. As long as you are an honest person, insolvency laws can be supportive of an entrepreneur,” says Carter.

Q. A friend has asked me to become a director of his company. What are the potential downsides if things go wrong?

A.Directors of a limited company have a fiduciary duty to act in the best interests of the business. If the company does become insolvent, an insolvency practitioner must to report on directors’ conduct to the department for Business Innovation and Skills (BIS.) If directors are found to have acted in a way that did not support the business they can be disqualified for up to 15 years. For example, if a small business owner dips into his company bank account to pay school fees (this is perfectly legal, by the way), and directors don’t stop it, then trouble can follow. If the business becomes insolvent, and directors knew money has been spent in a way that deprived the creditors of money then that is deemed unlawful. Directors would be banned from being a director of another company while disqualified, and included on a list of banned directors. Look very closely at the law before you take up the post.

Kathleen Brooks