Starting your own business is one of the most rewarding things you can do. It gives you control over your future and almost limitless possibilities.
But many business owners focus exclusively on growing their company, whilst neglecting the basics of financial planning.
It can be tempting to put off key decisions until you reach hypothetical future milestones, but the earlier you start, the easier it is to build a solid foundation.
Remember, your business might be a key part of your financial plan, but it is not the only factor in your future financial security. Below, we explore some other areas to consider, particularly in the earlier years of running a business.
Decide on a business structure
You will need to decide how to structure your business. The three main options are:
- Sole trader
- Partnership
- Limited Company
If you set up as a sole trader or a partnership, you will be self-employed in the eyes of HMRC.
This means that any profits you make (after allowing for costs) will be taxed as income in the relevant tax year. There are limited options for tax planning.
Additionally, if there is a problem or the business becomes insolvent, you may be personally liable for any debts or damages. You can reduce personal exposure by using a limited liability partnership (LLP). An LLP limits members’ liability for the LLP’s debts, though each member remains responsible for their own wrongful acts and may have responsibilities under the LLP agreement.
A limited company is a separate entity, which can reduce the personal liability for the directors. Additionally, there are many more options for tax planning.
Directors can receive their remuneration as salary or dividends and can reclaim any money they have loaned to the company, free of tax. The company can also make pension contributions on behalf of employees, including directors.
Companies can be more complex and costly to administer than a sole trader business or partnership, and they must submit annual accounts. However, the flexibility, tax efficiency and limitations on personal liability mean that it is usually beneficial for all but the smallest businesses.
Many business owners start as sole traders or partners in the early years, then set up a limited company when they are ready to scale up.
It can be easier to do this sooner rather than later, as an established business is likely to have assets, employees and professional relationships – all of which will need to be dealt with as part of the restructure.
Consider funding options
There is a strong possibility that you will need some form of funding for your new business. Even if you only need a phone and a laptop, you will need to ensure you have enough money to keep you afloat as you build your client base.
The main options for business funding include:
- Your own savings or a cash windfall.
- Business loans.
- Government grants may be available in certain industries.
- Private equity investors or venture capital. This is usually only an option for businesses with some form of track record, however, start-up funding may be available if you have a unique idea and a proven market.
The most suitable source of funding will depend on your circumstances, type of business, and the sector you wish to operate in.
Risk is also a consideration. Spending all of your savings and taking out large loans could be disastrous for your financial future if the business doesn’t work out.
You will need to undertake significant research, however. The government directory on business funding is a good place to start. A good business plan can also help you decide whether you need funding and how to approach this.
Plan for contingencies
Without the stability of employment, you will need to make sure that you are prepared for any risks or uncertainties. For example:
- Everyone should have an emergency fund to ensure they can deal with any unforeseen expenses or a short period out of work. This is even more important for a business owner, as ill-health or even just a few slow months can erode your earnings.
- Arranging enough financial protection to ensure that you and your family have a safety net in a worst-case scenario. This should include life cover, critical illness insurance, and income protection. Depending on your business and the type of insurance, your business can even cover some of the cost for you.
- Private medical insurance may also be useful, as you could access treatment earlier than on the NHS. This means you can get back to running your business more quickly.
- You will also need to make sure the business is adequately insured. If you employ anyone, employers’ liability insurance is legally required (minimum £5m cover). Public liability and professional indemnity are not usually required by law but are widely expected or contractually required in many sectors.
Diversify your assets
Many business owners fund their retirement by selling the company or by continuing to receive dividends while stepping back from daily operations.
But the future is uncertain, and there is no guarantee that the business will generate enough capital or income to sustain your retirement.
If you have a profitable business, it’s a good idea to take out some of your profits and build up wealth independently of the company.
Making pension contributions through the business is a good starting point. The standard annual pension allowance for 2025/26 is £60,000 (subject to tapering for higher earners and a £10,000 MPAA if you’ve flexibly accessed benefits).
Investing in ISAs, shares/investment accounts and even property can allow you to diversify your wealth and build up financial security outside the business.
Getting your family involved
If you have a family, starting a business affects them just as much as you. You might have to give up the security of paid employment and work long hours to get your new venture off the ground.
While it might be the intention to run the business with your spouse or another family member, sometimes it is worth one partner staying in full-time employment or both partners working part-time.
This means you have another source of income and can give the business time to become profitable.
Involving your family in the business can have tax benefits, for example:
- If you employ your spouse or children, their salaries and pension contributions are allowable expenses. Of course, they must genuinely work in the business, and their remuneration should be reasonable for the role.
- You can gift shares to your spouse without capital gains tax implications. This means they can receive dividends, making efficient use of both tax allowances.
- Gifting shares to children is normally a CGT disposal at market value. You may be able to defer the gain using Business Asset Hold-over Relief for qualifying trading company shares (claim required), but conditions apply.
Please don’t hesitate to contact a member of the team if you would like to discuss the financial planning implications of owning a business.
