The basics of running your own single-person company

Even if there’s just one of you, that might be enough to get started as a single person company. Here’s how to do it.

Thinking about starting your own business? You’re not alone. Times of economic uncertainty tend to lead to an increase in the number of people starting out on a new solo adventure. COVID-19 has been no different. With many people finding themselves unexpectedly with more time on their hands, the pandemic triggered a surge in new business start-ups.  Many of these will be starting as small as it is possible to get – with just a single person. If you’re one of them then this will be an incredible time. It will be exciting, frightening and stressful.

Nevertheless, for seasoned entrepreneurs this is the point in a business cycle they cherish the most. It’s why so many of them go back and start new enterprises time and time again. Many of these new businesses will fail, but the chances are – as with so many things in life – those who succeed will be the ones who get the basics right.

Company structure

The first thing to think about is how you’ll set up. When you start out on your own, the chances are you’ll be operating as a sole trader. This is the simplest set up for a company with minimal paperwork. You won’t have to register with Company’s House and will have limited administrative responsibilities. All you’ll have to do is register for self-assessment and make sure you pay your income tax and national insurance contributions. These will be set at varying levels depending on how much you’re earning.

As you grow, though, so will your tax liabilities. When your profits take you beyond the realm of basic rate tax (20%) to the higher rate of 40% (£50,271 to £150,000) you might consider setting up a limited company.

This is because you can optimise your tax obligations by adjusting the way in which you pay yourself. By reducing your ‘income’ to a low tax threshold you can supplement your income by paying yourself dividends – which are taxed at a lower rate.

The limited company structure also offers legal protections. Limited liability protects your personal assets in the event that something goes wrong – as a sole trader everything is exposed and in an increasingly litigious society, that can be a problem. 

Against this, you’ll have all sorts of new obligations, such as registering with Company’s House, filing annual reports, dealing with PAYE, establishing the name of a business and setting up a management structure.

In order to be a limited company you’ll need at least one director and one principle shareholder. In the case of a limited company, both these individuals will be you. In addition, you’ll also be your own employee which means you’ll have to set a salary, manage both employer and employee national insurance contributions and deduct tax. Trading rules are also more complicated – you’ll have to make sure you can meet all your obligations to avoid becoming insolvent.

Your biggest early decision will be when to move from the relative comfort of the sole trader structure to the more complicated – but tax efficient – limited company route. There are no hard and fast rules about this, but many accountants suggest that once profits exceed £30,000 you might want to start setting up a company.

Keep good records 

The early days of a business can be the most exciting, but they are also the most chaotic. Most importantly of all, your company will probably start much earlier than you think. While most will focus on the time at which you incorporate and register with Company’s House, the real genesis comes when you first have your idea.

For example, you might be walking along the street and spot an opportunity which others might have missed. At this point, it’s a very good idea to keep records. Any expenses you spend now, can still be offset against tax once you’re up and running.

Keeping the lights on

The most difficult thing at this point will be keeping things running. Most small businesses fail within the first few years. A cash flow crisis which makes it impossible to pay your taxes or meet running costs can be fatal.

For this reason it pays to plan ahead and follow a few basic rules:

  • Know your deadlines: A savvy business owner will know all their tax deadlines and plan ahead for them. This avoids being caught short with a deadline you can’t avoid.
  • Get a business bank account: It’s important to separate your own money from your business’. A specialist business bank account comes with specific terms and features which will help your company. At Xonder, we’ve created an innovative service designed especially for people in your situation.
  • Open a savings account: Any business owner understands the feeling of dread which comes with an approaching tax deadline. More often than not the final figure will be more than you think. You can prepare yourself by accounting for tax as you go and setting a little aside. If you put money into a savings account you’ll have a buffer at the end of the year which can help you meet your obligations.
  • Invoice regularly: The most common cause of a cash flow crisis is late payments. Making your customers pay on time is one of the biggest headaches for any small business, but there are things you can do to improve your chances. One of the most important is to invoice promptly and set clear payment terms. The earlier you invoice, the quicker you will be paid. Make sure they understand at the outset what’s expected of them and when they need to pay. When payment deadlines pass, as they inevitably will, make sure you chase them up promptly.

These are just a few pointers which can help you get the basics right when it comes to starting a single person business. Before you incorporate it can be useful to get advice from an experienced legal professional who can help you based on your current situation.

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