For many solo-preneurs, or small business owners, your business and yourself are difficult to distinguish. People come to your business because of what you (personally) offer to them – and of course, that’s probably why you started the business in the first place – to work closely with individuals, and not worry about corporate structures getting in the way.
For those that run their business through a Limited Company, though, it is essential that you see the ‘business you’ and the ‘you you’ as separate entities. A Limited Company is a separate legal being – it’s just that it can’t be born naturally, and needs a little help from the state to do so. As a separate legal being, you (the shareholder) are protected – your liability is limited to that which you have committed through your shares, but that comes with conditions. That’s where the ‘separation’ comes in.
Provided you keep your business separate, and (as the Companies Act 2006 says) take decisions “most likely to promote the success of the company” and follow the other legal responsibilities falling on you as a director, you (the ‘real you’) are protected from actions against the business. Technically, this separation of persona and business is known as the ‘veil of incorporation’ – we’ve got the House of Lords in 1896 to thank for that, but that’s another story! – but what does it really mean in practice?
Really, we are talking hats. No, not the difference between your cowboy stetson and winter beanie, but the hats you wear in your different roles. Are you running the business (as a director)? Or taking a dividend (as a shareholder)? Or perhaps you’re working for the business as an employee? Either way, you should act as if those are different hats that you wear at different times. Separate out your different responsibilities, as if you were different people.
Here are three practical things to consider:
First, and most obviously, keep separate bank accounts. This may sound obvious, but there are still some who run their business through their personal bank account. This is a recipe for disaster, not least when it comes to your tax liability at the end of the year. Running a separate set of accounts for your business needn’t be too difficult – but it is absolutely essential.
Secondly, make sure you talk to yourself. OK, I don’t mean literally, but if you have taken a decision on behalf of the business, to award yourself a dividend, what record have you kept of that? At least ‘two’ hats are worn in that situation – only the directors of a business can recommend the payment of dividends, for the approval of the shareholders as beneficiaries (who have right to approve or reduce, but not increase, the dividend proposed). Recording the decision is important – that you believe, as a director, that this is the right thing in the interests of the company in the long term, and that the business will remain sustainable as a going concern.
Thirdly, are you considering your business’s long-term sustainability. If you aren’t, and if you are taking on more debt, are you at risk of being considered to be trading ‘wrongfully’. Of course, no business owner wants to end up in the position of involuntarily winding up their business, but if you haven’t been acting lawfully up to that point, then the potential for personal liability is increased significantly.
There is much more to running a business, of course, but the responsibility of a director to act in accordance with the requirements of the Companies Act is an important part of what you have to do – and good governance will ultimately lead to much greater success for your business in the long term.
Now, where did I put my hat?