Business Protection for a One-Director Company
A one-person limited company is the most common structure in contracting and in plenty of trades, and it has a specific set of options.
You are the director, the shareholder and the employee. There is nobody to buy out, nobody whose death would leave you with a co-owner's family as a business partner, and no partnership agreement to worry about.
What there is, which a sole trader does not have, is a company that can own policies and pay for them, and that is where the useful difference lies.
The short answer
A one-director company has no co-owner, so shareholder and partnership protection do not apply. What does apply is cover the company can own and pay for: relevant life cover as a death in service arrangement for a single employee, and executive income protection. Both are usually funded by the company rather than out of income you have already paid tax on, though the treatment depends on circumstances.
What this changes
- The company is a separate legal entity, so it can own and pay for cover
- Relevant life cover becomes available as a death in service arrangement for a single employee
- Executive income protection becomes available, owned and paid for by the company
- Shareholder and partnership protection do not apply, because there is no co-owner
- Your income is usually salary plus dividends, which affects how it is evidenced
- A director's loan account may need settling if you die, and is frequently overlooked
The bit people miss
The director's loan account is the thing that catches one-person companies. If the company owes you money, that balance is an asset of your estate and may need to be repaid, which can leave a company with no cash and a family waiting. If you owe the company money, the overdrawn balance may be payable by your estate. Either way it is a real figure that nobody looks at until it matters, and it is worth asking your accountant what the balance is and which direction it runs.
The Company Can Pay For It, And That Is The Point
The main practical advantage of incorporating, from a protection point of view, is who writes the cheque.
Personal life cover is paid for out of money that has already been through income tax and dividend tax. Relevant life cover is arranged by the company for an employee, and the premium is normally a company expense rather than a benefit in kind, which usually makes it a more efficient way to buy broadly similar cover. Executive income protection works along similar lines for income cover.
The word usually is doing real work in that paragraph. The treatment depends on how the company is set up, how the policy is written and your own circumstances, and it needs confirming with your accountant rather than assumed from a web page. What we can do is arrange the cover correctly once the structure is clear.
There Is No One Else To Keep It Running
A one-person company has a particular fragility that a larger one does not, and it is worth planning around rather than hoping about.
If you cannot work, the company has no other fee earner. Invoicing stops immediately while costs continue: accountancy, insurance, software, possibly a lease. Clients who need the work done find somebody else, and a contract that lapses does not usually come back. The company can keep paying you only while it has money, which it will not have for long.
So the question is not only how the household is funded but whether the company should still exist in a year. Executive income protection deals with the first. A lump sum is what gives you the option on the second, by funding somebody to cover the work or simply by removing the pressure to wind things up quickly.
What usually fits, and why
A death in service policy for one employee, arranged and paid for by the company. Usually more efficient than buying the same cover personally, though the treatment depends on circumstances.
Owned and paid for by the company, covering your income if you cannot work. The company pays the premium rather than you paying it from taxed income.
A lump sum that can cover the period when the company has no fee earner, which for a one-person business is the entire business.
Common questions
What is relevant life cover and can I have it?+
It is a death in service arrangement an employer sets up for an employee, and a one-director company can usually use it because the director is an employee. The premium is normally a company expense rather than a benefit in kind, which generally makes it more efficient than buying similar cover personally. The treatment depends on circumstances and should be confirmed with your accountant.
Do I need shareholder protection?+
Not with a single shareholder, because there is no co-owner whose shares would need buying and nobody who could end up in business with a deceased colleague's family. Shareholder and partnership protection start to matter as soon as there is a second owner. If you are thinking of bringing one in, that is the point to look at it.
What happens to my director's loan account?+
It depends which way it runs and it is frequently overlooked. If the company owes you money, that balance is an asset of your estate and may need repaying, which can leave the company short of cash. If you owe the company, the overdrawn balance may be payable by your estate. Ask your accountant what the balance is, because it is a real figure.
Should the company or I pay for the cover?+
It depends on the cover. Relevant life and executive income protection are designed to be company-owned and company-paid. Personal life cover and ordinary income protection are bought personally. The mix that suits you depends on how you take income and on your accountant's view, which is why it is worth having that conversation before arranging anything.
How is my income assessed if I take salary and dividends?+
Insurers generally want to understand the whole picture rather than just the PAYE element, because a low salary with dividends on top is normal in this structure and a policy based on salary alone would be far too small. Bring your accounts and your most recent figures and we will make sure the cover reflects what you actually earn.
Cover that often goes with this
The gaps we most often find sitting next to this one.
- Relevant life coverDeath in service for a single employee, paid by the company.
- Executive income protectionCompany-owned cover for your income.
- If you contract through your companyHow income and cover fit together.
- If you are not incorporatedWhat is and is not available without a company.
- Talk to an adviserBring your accountant's view on how you take income.