Financial Advice for Business Owners and Entrepreneurs
Whilst there are numerous sources giving advice on growing a business, increasing the number of customers and sales, there are few that provide the basic financial advice that every small business owner needs.
This document covers the following areas:
- Business Investment
- Tax issues and Succession Planning
- Insurances that protect the business
- Pensions for business owner(s)
- Pensions and ancillary benefits for employees and the business owner(s)
- Using existing pensions to buy a business property
- Selling your business
Many businesses find that they retain excess profits or have regular excess income and donâ€™t know what to do with them.
They are often neither prepared to pay the income tax due on withdrawing these monies from the business personally nor comfortable yet in investing these monies into pension accessible only when they reach an age sufficient to do so.
These monies may or may not be required for future projects or in these uncertain times as a backstop against future trading concerns.
These monies are currently languishing in business deposit account paying little or no interest and are certainly seeing their value eroded in real terms by inflation.
There is a solution.Book a Call or Meeting
In the same way as individual's can invest monies, so can businesses into similar structures (excluding ISAâ€™s) and identical funds but these monies are held in the name of the business and readily accessible to meet future plans or requirements.
Thorburn Wealth Management Limited have extensive experience in this area and are happy to advise.
Many business owners, entrepreneurs and the self-employed have complex finances. When you then consider that they are often having to focus on building and running their businesses, it is no surprise that many also struggle to manage their finances.
If you find yourself in this position, then the time to act is now, as delay could seriously damage not only your business but also your personal finances.
At Thorburn Wealth Management Limited we will work with you, and together with any other business advisers you have, we will plan and structure all your finances in the most tax-efficient way. Thus, we can ensure your money is working as hard as is possible.
The issues of succession and Estate Planning also need to be considered. The business needs to be protected so that it can be passed on to the next generation or retain its value so that it can be sold on when the business owners want to retire or move onto something else.
Acting now to protect your business goes hand in hand with protecting your personal wealth, so it is important to take all the necessary measures. There are five main areas that need to be addressed: -
- Loan protection
- Key person protection
- Partnership / Shareholder protection
- Death in Service Benefits
- Income protection
Business Loan Protection
This type of insurance provides funds to repay any loan, commercial mortgage, or even a directorâ€™s loan if one of the owners of the business dies or suffers a critical illness.
Such policies can also provide life and critical illness cover. This means when a claim is made the sum assured can either be paid to the business or directly to the lender, as required.
Most types of business loan can be protected, including:Book a Call or Meeting
- Commercial mortgages and loans
- Venture capital loans
- Loans made by any of the Directors
- Directors' Personal Guarantees
Key Person Protection
Many businesses, have employees that are critical to its operation. If any of them, or indeed one of the owners, were to fall ill or die, there could be a significant financial impact on the companyâ€™s profitability and value.
Could Your Business Survive the Loss of a Key Employee?
If the answer is no, then you need Key Person Insurance. These can either provide a lump sum if they die or are diagnosed with a critical illness or pay out a regular income when the key individual is unable to work.
Partnership / Shareholder Protection
If you have a business where the 'ownership' is spread amongst a number of people, each having a number of shares, then there are circumstances where you could run into difficulties.
For example, another Partner / Shareholder may fall ill with a critical / terminal illness, or perhaps die. In such instances their share of the business could be bought by a competitor, or someone who does not have your best interests at heart.
Alternatively, the family of the deceased business owner may simply want to withdraw their value from the business and have nothing further to do with it going forward.
How would the business raise the capital to pay out those monies?
Would a bank be prepared to lend, maybe, maybe not as there is nothing in the transaction which would give them comfort that the business would progress such as a loan to buy machinery might. Many good businesses have needed to be wound up or sold to pay out the deceased's owner's family.
Partnership / Shareholder Protection is designed to overcome this, with business owners being able to buy shares back from any partner / Shareholder so affected and equally important having the monies to do so.
This cover helps surviving owners stay in control, minimises disruption to the business and saves the remaining owners having to raise capital personally if this is indeed possible.
Partnership / Shareholder protection allows the remaining partners / shareholders to buy back their capital from any partner who dies or is diagnosed with a terminal illness, but can also be extended to include critical illnesses also.
The Partnership / Shareholder arrangement sets out how any partnership capital / shares that become available are to be valued and lays out how the surviving partners/ shareholders can buy these back. It also details the outgoing partner /shareholders 'rights to sell'.
Each individual partner/shareholder normally takes out separate cover, known as an 'own life' policy. This provides insurance to the value of their partnership capital / shares. This is then written into a trust to benefit their co-partners / co-shareholders to provide them with the means to buy back their holdings.
This puts money in the hands of their family and their share of the business back in the hands of the remaining owners in proportion to their current share.
There are double and single option agreements, and it is vital that if a trust is to be involved that careful consideration is taken.
The Partnership Agreement / Articles of Association must reflect the proposed arrangement and the arrangement must be kept under regular review as the value of the business changes. This is all a part of the 'advice package' that Thorburn Wealth Management provides in conjunction with your legal and accounting advisers.
Death in Service Arrangements
Whether for the owners of the business or for all or some of the employees, one of the best benefits that any business can put in place are Death in Service Benefits to provide the family of the deceased with a lump sum payment to enable them to recover from the loss of their family member.
Relatively inexpensive to arrange these should always be considered as part of any remuneration package.
The business will have a contractual liability to provide some form of benefits when the employee is off sick. The business can either insure against the cost of providing that income or absorb the costs.
Depending on the nature of these, the business can either insure against the cost or alternatively extend those benefits until the employee is able to return to work.
Can you imagine trying to survive without your income for more than a few short weeks?
Pensions for Business Owners
Your Business as Your Pension
Many business owners are relying on the sale of their business to fund their retirement. This can be an excellent plan, but you should also make sure you take advantage of the many generous tax allowances the Government offers and also spread the risk of having all your eggs in one basket.
There are numerous examples of goods that were once consumer staples, such as DVD players and CD's to name but two that no longer command significant market shares.
At the speed consumer tastes and technology is changing you would not want to trust your entire future to something that may no longer be as relevant or popular when it is most needed.
We will help you by: -
- Showing you how much you should and can afford to pay into your pension
- Detailing the methods you can use to make the most tax-efficient pension contributions
- Ensuring that you understand and are making the most of your annual and lifetime allowances
- Providing information as to how you can use your pension, not only to purchase commercial property from your own pot, but also how you can take loans from your company's pension assets to fund expansion
- Using this pension as a tax efficient means of passing benefits down to your family
Buying Commercial Property with Your Pension Funds
You could well be considering starting a business, but do not know how to fund the purchase of the commercial property needed. Well there is good news here, as it is perfectly possible to buy commercial property in the UK using your pension pot.
This is because as in the same way that your pension can be used to invest in stocks and shares, it can also be used to purchase the bricks and mortar that is a commercial property. You can invest in warehouses or retail units as well as offices. Please note though, you cannot invest in residential property.
The Benefits of Investing in a Property for Your business
This avenue of investment provides some 'hidden benefits' too.
Firstly, you have the use of a property in which to operate your business, whilst also bringing regular rental payments back into your pension pot.
Secondly, as it is your business that is occupying the premises, you don't have to worry about tenants damaging the property.
Thirdly, the rental payments are an allowable business expense which depresses the taxable profits of your business
Fourthly, the rental income payments do not count towards the annual allowance which restricts pension contribution limits
Also, if you sell the property, the proceeds go back into your pension fund, and if you have made a profit on the sale, no matter the extent, this is not subject to any capital gains tax, as the monies are being paid into a tax efficient pensions scheme.
Employee Pensions Schemes and Auto Enrolment
Even if your business employs just one person, setting up a workplace pension is a legal requirement for all UK businesses, although there some exceptions which we would be happy to explain to you.
In order to meet your auto enrolment duties, you will need to select a pension scheme that both you and your employees will pay into.
Whilst this may all seem a bit daunting, the good news is that we can help you set up and administer the plan.
Whether you want a plan simply to meet your legal obligations (Auto Enrolment) or something a bit better to really reward your employees and provide for their future Thorburn Wealth Management Limited can help
Selling Your Business
For many business owners, the time comes when they want to sell their business. Of course, methods vary greatly depending on whether there are many joint owners, but in all cases, there are issues that you have to consider.
In some instances, the business owner wants to keep it 'in the family' and to get the maximum value for their business from their children. Others may gift the business, and then fund their retirement by taking an annual salary under the role of a consultant.
Transferring ownership can be accomplished in various ways. One method is to put the business into a trust, whilst another is to sign over only a small percentage of the business, dividing it among the children.
Selling to someone outside the family may turn out to be less complicated, but even here things need to be carefully handled, something that Thorburn Wealth Management Limited is ready and willing to help with.
The Financial Conduct Authority does not regulate taxation advice.
The value of your investment or pension can fall as well as rise and you may not get back the original amount invested.