The basics of running your own single-person company

24th September 2018

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Many people dream of setting up their own business, attracted by the idea of being their own boss, following a passion and forging their own future. But what sort of company should you set up and what is the process of doing it? Should you be a sole trader or should you take the limited company route?

People should really only consider setting up a limited liability business once their business reaches the ‘tipping point’ of around £30,000 of profit, according to Kathryn Heald from In-Accountancy, a local accountancy firm based in Manchester.

“Until you’re making a substantial profit there are a lot of responsibilities that come along with the legal entity of a company, such as accountancy fees, compliance and filing obligations,” she says. “The most suitable structure also depends on what business you offer, your attitude to risk and who your end customer is.”

We live in an increasingly litigious world, adds Chris Ford, a chartered accountant at Lucraft, Hodgson & Dawes, an accountancy firm based in Sussex. A limited liability company protects your personal assets, whereas as a sole trader, everything you own is liable if something goes wrong. (For more information on different structures, the Federation of Small Businesses provides a good guide here.)

Although setting up a business sounds daunting, it isn’t necessarily as complex as you think, especially if you take the small steps to get it right at the beginning. Here are the best ways to keep that business running smoothly.

Keep good records

An idea hits you out of nowhere – maybe after an episode of Dragon’s Den – and after ruminating for a few months, you think, maybe I can do this, and maybe I can do it better than anyone else. If you start researching now, it might pay off.

“If I have a business idea today and start doing preparatory work yet the company isn’t founded until a few months down the line, I can recoup some of those set-up costs,” says Chris. “Six to nine months is not uncommon to get a business idea up and going. It can go further back, but the more time goes by, the harder it gets to justify those costs as specifically for the business.”

There are many perfectly legal and sensible ways for business owners to use their expenses to reduce their taxable income. They range from using your own home as an office, mileage on your car, stationary and office equipment to the annual staff party. HMRC hosts live webinars on what you can include as capital and revenue expenses – check out the next one here.

Chris adds that business owners should set aside time to make a note of what expenses they added up throughout the week – even if it’s just 15 minutes – otherwise costs could easily slip through the net.

To make it easier, Ford recommends making use of technology. Plenty of it is cheap, or free, and you can share documents online with your accountant.

“There are lots of apps and cloud technology around or, at the very least, you can set up a very simple spreadsheet,” he says. “Many of our clients just use Excel.”

Protect yourself with a contract

You might boast that your business offers a reliable, efficient service. But what about the other people you do business with?

To help you sleep easier at night, make sure you send service users and suppliers a contract as a matter of routine, setting out the terms of the project or service, the timeframe and clear payment terms. Other aspects might come into it, such as intellectual property, or IP, rights (IP refers to your ideas and inventions) or the rights to usage or resale - it’s worth getting it right from the beginning, so consider having a lawyer look over the document. Many template contracts can be found online, such as here.

For further protection, get insured. Plenty of market comparison websites will show you the best deal for small businesses - although cheapest doesn’t always mean best. As a limited liability company, only your business assets are at risk if something goes wrong, and it’s not a legal requirement to get insurance, but it could save you money when it comes to compensation claims and legal costs from third parties.

Change your mindset

One of the biggest challenges when setting up a single person company is learning how you can take money out of the business.

“If you’re a limited company you definitely need to get into the mindset that it’s the company’s money, not your money, until you draw it out,” says Kathryn. “A trap that people can fall into is spending that money as if it’s their own.”

You will need to be disciplined and plan ahead, so start thinking about your outgoings and when you need to pay them. This includes paying yourself a salary, and planning how else you can take money out of the business, like via dividends, which are explained below.

Make use of tax-free allowances

One way of taking out tax-free money from the business is the so-called “alphabet share structure”, where you can transfer shares to your family members.

“Changes introduced in April 2016 mean that individuals receive a tax free dividend allowance (current year is £2,000) and are liable to pay tax on any further dividend drawn. There are tax planning opportunities which involve bringing family members into the business as shareholders to utilise their tax free dividend allowance.”

Chris adds that anyone receiving shares should be involved and working in the business from day one, to satisfy HMRC, otherwise you might still have to pay tax on that money.

Another good way to manage extra funds is by making use of your tax-free pension allowance, which is capped at £40,000 per year. If you have questions about tax or financial products, its worth consulting a financial adviser.

Know your deadlines

Savvy business owners need to know the deadlines throughout the year for paying tax. As well as the company year-end and filing dates, you’ll also have personal deadlines too. “In the first year a lot of people don’t realise that they will have to make payments on account toward the tax liability for the second year,” says Kathryn. “It can come as a bit of a shock that your first payment will be 1.5 times your tax bill. This will balance out in the following year.”

After the first tax year, you pay in instalments every six months in January and July. Another common trap is corporation tax. For single person companies, it often isn’t payable until nine months after the end of the tax year.

To help you plan and pay on time, it’s a good idea to send invoices immediately after finishing your work, with clear payment terms. As all business owners know, there is no harm in chasing up - we have to do this ourselves because currently there is no legislation which penalises companies for systematically paying invoices late.

Set up a savings account

Most people can relate to the feeling of fear or dread when they calculate their tax bill and realise it’s more than they put aside.

The tip is to note down all your expenditure and calculating tax as you go along and put that money aside. At Starling, it only takes a few minutes to set up a mobile-only business account, and our Goals feature means you can save money for different objectives, like income tax and VAT, without opening more accounts.

“We really recommend setting aside 20-25% of your income for tax,” says Kathryn. “It means it’s out of sight, out of mind, so you don’t find yourself short at the end of the year.”

If you do charge VAT, make sure you are registered. It only applies if your business turns over more than £85,000 a year.

Have the right team

Hiring the right employees can take your business to the next level, but before you even reach that stage, having a support network to help you with tax and admin is critical.

“It’s definitely important to surround yourself with great individuals from every side, such as the right financial adviser, an accountant, HR and legal professionals to give you the support you need,” says Kathryn.

For example, some accountants prefer to only do year-end accounts – and be warned, accountancy fees purely for the purpose of helping you fill out your tax return may not be an allowable expense by HMRC – while smaller accountancy firms can be a lot more hands on.

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Starling for Business stories: Samantha Blake