Running a small incorporated business within the parameters of the law is much more complex than many people imagine. There are thousands of small companies operating in the UK, many of which have just one or two members. However, of those companies there is a substantial minority operating their business ignorant to what is legally required of them, that could ultimately face litigation were they ever to sell their small business to savvy, well advised investors.

As a result of recent legislation, the limited company no longer requires a company secretary and there is only a requirement for one director in private limited companies. Thus it’s now possible to run a private limited company as a one-man band, without the need for involving others in its administration and management. However, many small businessmen fall into the trap of believing that means they can treat the business as an extension of themselves, or as a piggy bank from which they can take money as and when they please.

Unfortunately as many find out when they later sell their business, or bring on an investor, this is not the case. The limited company is a separate legal person, and taking money that has not been authorised from the company, i.e. an unlawful distribution could land you in serious trouble with the courts. The company should be run properly and managed, and any payments to you should be in the form of a salary, bonus or dividend payment and should be recorded in writing for the sake of record keeping.

On the subject of keeping records within your small business, a limited company is legally required to maintain day to day financial records and to retain these records for inspection for up to 3 years. If you don’t have these records, both the company and the directors have committed a criminal offence and can be subject to criminal penalties as a result. If you’re running a small business without keeping adequate records, it may be time to start considering your options, and it’s better to start keeping those records right away to ensure you do not fall further behind.

There are naturally tax implications of running a small business as an incorporated entity. For example, if you were to run a business making £10,000 in profit, you would be subject to corporation tax of 20% on that £10,000 and income tax on any money paid out as salary (assume £20,000 which would also be taxable at 20% and deductible from the profit figure, plus National Insurance contributions). Thus the total tax paid in this instance would be £6,000 plus additional National Insurance contributions at both employee and employer level. However, were the money to be paid out in dividends from a £30,000 profit, National Insurance would no longer play a role, and the dividend payments would attract no additional tax.

Finally, running a small business requires the director to treat himself as an agent of the company, and to act in the best interests of the company rather than in his own interests as the major shareholder. Even where a director also owns 100% of the shares, it is his legal duty to act in the interest of the company and subsequent legal action from new shareholders tackling retrospective actions could see him liable to compensate the company in respect of any losses it sustained from him acting outwith the scope of his duty.