Thinking of setting up a financial business? What you need to know.
Created: June 2017
If you’re ready to go it alone in the financial services sector, you’ll understand the need for a comprehensive business plan backed up by incisive and diligent accounting. The ultimate goal is to pursue opportunity while balancing the demands of process and regulation. And wherever possible you’ll want to make the rules work for you.
In this blog we’ll discuss the fundamental decisions around finance, company structure, processes and external support that will enable you to minimise risk while maximising revenue and profitability.
What’s the best structure for your financial business?
Will you incorporate a limited liability company (Ltd) or a limited liability partnership (LLP)? There are advantages to both depending on your business objectives. Both structures lend credibility to your firm and make it relatively easy to borrow money and limit your exposure to financial risk.
- Limited companies pay corporation tax on their profits
- Company directors are taxed as employees
- Company directors can take out dividends
- After corporation tax you will still have to pay income tax on your salary
- LLPs enjoy the same limited liability as limited companies
- LLPs also have the tax regime and flexibility of partnerships
- Members’ shares of profits are taxed as income
- Each member has to register with HMRC as self-employed.
How will your firm finance its operations?
The mixture of long-term debt and equity you use will directly affect the risk and value of the business.
You must decide how much money should be borrowed and how cheaply you can obtain it. How much of your cash flow will go to creditors and how much will go to shareholders? Each business is different. More aggressive debt-equity ratios are great for rapid growth but may limit your earnings.
It is possible to incorporate an LLP within a company, or a company within an LLP. The latter in particular can improve cash flow.
All businesses are obliged to keep sufficient working capital to pay essential outgoings, including salaries, rents etc. Within LLPs, all profits are taxed at the partners’ marginal rate (40-45%). It can be more efficient to keep this capital within a company, where it would be subject to just 20% tax (17% as of April 2020).
This structure is for cash flow only, as the money would be taxed either way at the higher rate when taken out. Take advice to avoid falling foul of anti-avoidance legislation.
Make sure you’re covered.
Take out adequate policies to cover you in the event of ill health or legal action:
Directors and officers insurance – protects you against being sued.
Keyman insurance – makes provisions for the incapacitation or death of a member of staff of central importance to the business.
Which functions are critical – and which can you outsource until you’re ready to expand?
Whether you’re Ltd or LLP, don’t be surprised by the level of admin.
Once you are trading, there’s a lot of bookkeeping. You will be required to submit statutory accounts and a tax return to HMRC each year (more if you’re FCA registered), as well as handling payroll and making monthly or quarterly payments of employees’ income tax (PAYE) and NICs. And don’t forget all the VAT payments of varying complexity every quarter.
There aren’t really any ‘optional’ obligations. Aside from cash flow, accounting and compliance are critical to the long term success of your business.
But remember, you always have the option to outsource the majority of tasks that distract you from growth.
Checklist for success
If you’re just starting out, it pays to get it right first time. But finance never stands still. Experienced operators know it’s worth regularly taking stock of processes and structure to ensure you’re maximising the return on your dedication and hard work:
- Devise a well-honed business plan that sets out what you’re trying to achieve and how
- Choose the optimal structure for your business to protect your interests and limit your exposure to risk
- Secure ample capital to pursue your objectives (see [Quick guide to your tax obligations] to explore tax efficient ways of raising funds)
- Establish astute accounting and compliance processes to keep the regulators happy and give clients confidence
- Ensure you have robust processes in place to help secure and maintain FCA registration
- Consider appointing non-exec directors as your business expands to provide a valuable outside perspective.
For more tips and advice for financial entrepreneurs download our FREE guide.