by Paul Jarvis
Taking the opposite approach, the company-of-one approach, can work just as well, if not better. Being able to launch your business without any investment (other than a tiny bit of your own time), you don’t have to make as many assumptions about the market, your product, or your potential customers. You can start your company of one simply by making your business idea as small as possible, then launching quickly.
For example, Creative Class (my own first online course) started out as an idea for thirty lessons, which would have taken me four to six months to create. I also wanted to develop course software to run it (another four to six months of work). I resisted the urge to spend four to six months writing lessons, however, and instead started with seven lessons and existing software; this way I could launch in a month instead of a year. The quick launch enabled me to see what worked and what didn’t with an actual audience, and then I could adjust, iterate, and improve. After starting with seven lessons, I added seven more, based on the feedback I received from students. With the second round of seven lessons, I was able to get my course out quickly, have it generate money, and then adjust it based on real feedback from paying customers. By the sixth version of the course, it was making enough money to sustain me.
THE SETUP
While obviously the company-of-one method is to start with as little as possible and then grow it slowly or as needed, there are still some factors that need to be considered.
Money
Too often businesses focus only on revenue. For companies of one, expenses are just as important, since the sooner you can reach MVPr the better.
Let’s look at it this way. If you offer a service for $1,000 and your monthly expenses are $2,000, then you need at least three clients per month to be profitable. If you need $4,000 to cover your expenses, then you need at least five clients to be profitable. Honestly consider two questions: In the beginning, can you reduce any of your expenses so that you can do less work to be profitable each month? And how likely is it that you’ll get the number of clients or customers you need each month to be profitable? If acquiring three clients seems doable but having five would stretch you too thin, you’ve got to either reduce your overall costs or raise your rates. Consider how long it takes to find a client, court the client, work with the client, and then finish up each client’s project. Is there enough time in a month to do that five times? Or even three?
The same questions need to be asked of a product business. If you price your product at $50 and your costs are $30, then you don’t need to sell 40 products ($2,000/$50 gross = 40 units) to reach $2,000; rather, you need to sell 100 ($2,000/$20 in profit = 100 units). Again, if your expenses are $4,000, you need to sell 200 units. How likely is that?
Another factor related to money is how you spend your time. Every day you spend developing a product is a day you aren’t really making money from it, unless you’ve done preorders or crowdfunding. How can you get an initial version of your product to market quickly to start building revenue?
Money is why a lot of companies of one begin as side projects: their path to MVPr in order to cover the founder’s expenses can take a bit of time. I offset my own living expenses at first by living at home with my parents (hey, I was only nineteen), and then by taking a few years to slowly transition fully from services to products — and not until the products were routinely making more than what I was charging for services.
Legal
Small businesses can be taken advantage of, ripped off, or screwed out of money they’re owed — sometimes by larger businesses, but sometimes by businesses the same size. This is why having legal systems in place right from the start is important.
You need to ensure, first, that your business entity is set up properly for the country and region you’re operating from, and second, that your business is removed by one layer from you personally. In other words, your business should be its own legal entity — a corporation in most countries or an LLC in the United States. That way, should anything go wrong in your business, it is your business that is liable, not you personally. All money should go into your business directly, not straight to you, and then you should be paid out, by salary or dividends. There are so many different ways to structure a business — based on your needs, what you provide to clients or customers, and where you’re located — that you probably need a lawyer (and an accountant sometimes) to help you set up the right business for you.
Next, after you’ve separated your company of one from yourself personally, you need to prevent your company from being taken advantage of. With service-based businesses, this means having contracts between your business and your clients. In the beginning, you can source contracts fairly cheaply online. Eventually, it makes sense to enlist the help of a lawyer who’s familiar with both your area of practice and how laws work in your geographic location and who, of course, can make sure that your contract is sound. For a product-based business, this means having users agree to your terms of service before they pay you for what you’re selling.
The reason for having a business lawyer — and one who’s on contract, not an employee — is not so that you can sue everyone, but so that lawsuits rarely happen. I pay my own business lawyer a small yearly fee as a retainer so that I can ask him a few questions now and then, as a preventive measure. He makes sure not only that the threat of my business being sued is as small as possible, but that the need for my business to sue anyone else is as small as possible too. Having to take someone to court, or being taken to court, would put a lot of stress and strain on the daily operations of my company of one.
The best lawyer for a company of one is one who understands the type of business you do and is happy to work with a business of your size. And in general, I’ve found out the hard way that it’s never a smart idea to be either the biggest or the smallest client of anyone you hire for their professional services.
Accounting
I’ve always believed that good accountants should save you more money than they charge. This belief may be misguided — I have no studies or data to back it up — but nevertheless, my own accountants definitely do this.
To find the best accountant for your company of one, look for a firm or individual who has knowledge of your type of work and familiarity with businesses of your size. My own business needs a firm that understands how online business works, and how to deal with revenue that comes from selling digital products primarily in the United States (in U.S. dollars) while my business is in Canada (operating in Canadian dollars).
An accountant is not just a person you talk to at the end of your business year when you file your taxes. You can use an accountant as an adviser on all things related to government requests, on how to stay up to date with financial laws (so you don’t inadvertently break them), on sound ways to pay yourself and pay your expenses, and on how best to structure your business to pay the least amount in taxes.
I talk to my own accountant every few months — whenever I’m thinking about making any changes, adding a new product or partnership, or anticipating a new and large expense — or anytime I get a letter from the government to my business (since those typically aren’t written in understandable language). I also have my accountant audit my bookkeeping to ensure that everything is done correctly and nothing is missed. I would rather focus on making money than have to figure out the convoluted details of how much I owe the government, so I gladly lean on my accountant for this service. Again, I hire accountants as independent consultants, not as employees, as a company of one doesn’t need a full-time accountant.
Salary
As I mentioned in the legal section, you need to make sure your business is separated from yourself, and to this end, the first thing you need to do is open a separate bank account for your business and then, from that account, pay yourself either a dividend or a salary. Since revenue from my work can sometimes be inconsistent, I’ve always figured my base salary as the average I’ve made in profit (not revenue) for the last twelve months, minu
s 25 to 30 percent (to set aside for taxes). Before raising my salary if my profits increase, I also take into consideration the minimum amount I need each month to live on and be comfortable. With my twelve-month average profit in mind, and not going too far past my minimum living expenses, I can set myself a fairly steady salary. Obviously, you can change this up if you find you need less money — or more — but keep in mind that the more money you take out of your business, the more it’s taxed.
The biggest thing to consider when you work for yourself is that even if you’re paying yourself the average of the last twelve months, there’s no guarantee you’ll make the same profit moving forward. That’s why it’s important to have a “runway buffer” — a bit of savings to cover yourself and your expenses if there’s a slow month or two. Because I like to play it very safe, I have a six-month runway buffer of liquid assets that I can easily and quickly access if I need to. Other people I know are comfortable with a three-month buffer, so just decide yourself what works for you. Personally, I wasn’t even willing to start working on my own full-time until I had a runway buffer saved up.
Another factor in how much you pay yourself is how much time off you’d like. If you want to take four weeks a year as vacation, then you’ll need to set aside a month’s worth of extra savings (on top of your runway buffer). Unless you’ve got a recurring income stream (like recurring revenue from monthly software licenses), if you aren’t working, you may not be making money.
Having a runway buffer of liquid savings also helps when unexpected events come up. A family member falling ill or passing away can require you to take time off that you hadn’t planned for. In this event a recurring income stream and runway buffer can be a great help at a difficult time.
Savings
Alongside a salary and a runway buffer, I truly think companies of one should invest as much money as they can save up in passive investments like index funds. If inflation is approximately 3 percent per year, then you’re losing money on any assets you’ve got that aren’t making at least 3 percent per year in returns. This applies, by the way, to all the money in your bank account, since checking and savings accounts pay barely any interest.
Since I don’t have an employer putting money into a 401(k) or Registered Retirement Savings Plan, created by the Canadian government for Canadians like me, I’ve got to consider how I can make the most of being in the prime of my earning potential and save for the future, when that might not be the case. And just as I do with my salary, I have an automatic withdrawal set up to transfer money from my bank account into my investment account each month — in an amount that’s high enough to matter long-term but low enough not to affect my liquid assets.
The goal here is to work your money in small steps. First, ensure that your company of one is making enough profit to cover your living expenses. Second, make sure you’ve got enough of a runway buffer built up to work full-time at your company of one, even if things get slow. Third, with your salary and runway buffer covered, you can reinvest money in your company; if things are going well, you should be able to get a better than 3 percent return on such an investment. Alternatively, if you don’t need to invest more in your company — maybe your business costs are covered and you have no reason to grow them — you can invest any extra money in something like index funds.
I use a robo-investor with very low management fees and keep my money in index funds that require no upkeep on my end. Once a quarter, I check in on my investments, and if I have questions I talk to someone at the company. But since these investments are long-term, I’m not worried about daily or even monthly losses or gains. I just want to see my money grow over decades.
Health Coverage
Depending on the country you live in, medical coverage and insurance can be a huge factor in deciding if you’re going to go on your own and start a company of one.
Jonnie Hallman, the founder of Cushion (which offers scheduling software for freelancers), found that the number-one reason his fellow Americans don’t venture out and start their own companies is their worry about the cost of health care. Insurance can definitely cost more when you aren’t part of an employer or group plan, so shop around before you make your choice.
Luckily in many other countries, like Canada, basic health care is available to every citizen. Canadians only have to worry about obtaining extended medical insurance, critical injury insurance (in case they’re injured for a long period of time), and life insurance. But in the United States, health care coverage continues to be an issue. As a company of one, you’ll definitely find it worth your while to do some outreach to see where you can obtain health and life insurance.
Regardless of where you’re located, there are usually groups you can join to take advantage of bulk savings, such as professional associations, chambers of commerce, and business groups.
Lifestyle
And now, with the nitty-gritty of money and insurance coverage out of the way, we can turn to the question of the lifestyle you want your company of one to allow you to have. Regardless of the type of work you do, how you work is always going to involve a lifestyle choice. The benefit of a company of one is that you can build your lifestyle around it, optimizing for both profit and your own happiness.
The first step is to develop a consistent, healthy monthly revenue to cover costs, your runway buffer, and investments. Once you take care of those considerations, a beautiful thing happens: you’re presented with choices. You can choose to make more money, if that’s what you want, or you can choose to work the same and make the same amount. If you make the latter choice, you can then start to prioritize. Do you want to spend more time with your family? Do you want to explore the world? Do you want to spend more time experimenting with new business ideas and opportunities?
By removing the hurdle of having to consider scaling up in all areas at all times when things are going well, you can open yourself up to investing in enjoying your own life. You will have the freedom to enjoy the benefits of having figured out how to make “enough.”
And then, if our goals are similar, I hope to see you out hiking on the trails in the wild Pacific Northwest one day soon.
BEGIN TO THINK ABOUT:
■ Your purpose or reasoning in starting your own company of one, and whether it will hold up over time
■ How you could start your own company of one right now, with some first version of what you want to do
■ What you need to do to set up your company of one correctly and responsibly, both legally and financially
Afterword: Never Grow Up
There’s a hotel nestled in the picturesque countryside of Japan’s Yamanashi prefecture, the Nishiyama Onsen Keiunkan, which is the oldest continuously run hotel in the world. It has been in existence for about 1,300 years (it opened its doors in AD 705) and managed by fifty-two generations of the same family.
Empires have risen and fallen around Onsen Keiunkan, great wars have ravaged it, and massive economic booms and busts have come and gone. Still, the hotel has endured and remained profitable enough to stay open for business. The hotel has thirty-five rooms and access to six natural hot spring baths, which are open 24/7 to better serve their guests. The water of the baths is pure, alkaline, and neither artificially heated nor treated. The hotel serves simple, seasonal food, locally sourced from the surrounding mountains and rivers. Besides the baths, there are no other attractions in the nearby area, and there’s definitely no wi-fi or ride-sharing. Still, it’s been a popular destination for far longer than any of us (or our great-grandparents) have been alive. Guests have included emperors, politicians, samurai, and military commanders.
The hotel’s focus, since the beginning, has been on customer service, not on growth or expansion. It’s stayed small because the top priority has always been making guests comfortable.
How the Onsen Keiunkan has succeeded by not choosing exponential growth is a story best told by looking at its peer: the oldest continuously run business in the worl
d, Kongō Gumi, a Buddhist temple construction company. The founder, Kongo Shigemitsu, saw an incredible opportunity: Buddhism was catching on quickly, and so temples needed to be built. For the next fourteen centuries (i.e., long after the founder’s death), the company kept busy building temples. Like their hotel peer, Kongō Gumi kept a relentless focus on serving customers and being absolute experts at their craft, and that focus enabled the construction company to be resilient enough to endure.
For 1,428 years, Kongō Gumi hummed along as a construction company. Things suddenly changed, however, when they decided to expand into real estate during a boom in the Japanese market in the 1980s due to an epic financial bubble and unconstrained credit growth. For a while, Kongō Gumi reaped the short-term rewards of fast growth, but as so often happens, that growth wasn’t sustainable.
By the start of the 1990s, the financial bubble had completely burst in Japan. Companies that took on vast amounts of borrowed money with artificially suppressed interest rates were left with nothing but debt. Debt was like a popular drug — everyone was doing it and every business seemed to have access to it.
Kongō Gumi ended up with close to $343 million in debt. It was sold to a larger company and ultimately liquidated a few years later — bringing its extremely long run as a company to an end. The temple construction company had survived countless political crises, two atomic detonations, and even a period when the Japanese government set out to eradicate Buddhism from Japan completely. But ironically, what they couldn’t survive was the cost of rapid growth. Their downfall was putting growth above stability and profit.