Do you need insurance to set up a business?

29th June 2026

When setting up a new business, there are several important decisions that will shape its financial future, and right at the top of this list are the insurance policies you choose to invest in.

You don’t need insurance to incorporate a business, but once you begin actively training or hiring employees, it becomes necessary. But which policies are legally enforceable and which should you be looking at to protect the future of your operations? 99p Company Formations explain below. 

Is business insurance mandatory? 

Whether insurance is legally required depends largely on the type of business you operate, whether you employ staff, the industry you work in, whether you are self employed, and the risks associated with your activities.

Some businesses can begin trading without purchasing any insurance at all. Others may be breaking the law if they operate without specific policies in place. For example, a freelance graphic designer working alone from home faces very different risks to a construction company with multiple employees working on customer sites.

Many insurance policies that are not mandatory still provide valuable protection against claims, disputes, accidents, and unexpected events that could otherwise cause serious financial damage.

Therefore, before you begin trading, you need to consider what level of protection you are likely to need. 

Which types of insurance are mandatory? 

The following types of insurance are legally required for businesses across the UK: 

Employers’ Liability Insurance 

The primary legal requirement is Employers' Liability Insurance. If your company employs staff, you will need this cover from the moment those employees begin working for you. The law requires businesses to hold a minimum level of employers' liability cover of £5 million with an FCA-authorised insurer, although most insurance policies provide significantly higher levels of protection.

Employers' liability insurance is designed to protect businesses if an employee becomes injured or develops an illness as a result of their work and decides to pursue compensation. Failing to maintain appropriate cover can result in substantial fines.

This could include situations such as:

• An employee suffering an injury while using equipment

• Exposure to hazardous substances

• Accidents occurring on business premises

• Repetitive strain injuries

• Work related illnesses that develop over time

Are there any exceptions?

Some businesses may not need employers' liability insurance.

Common exemptions can include:

• Sole traders with no employees

• Companies where the only employee is the owner under certain circumstances

• Some family run businesses employing close family members

• Certain public organisations

However, the rules surrounding exemptions can be more complicated than many people realise.

For example, a company director may still require cover depending on how ownership and employment arrangements are structured.

Because the penalties for non compliance can be significant, it is always worth confirming whether your business qualifies for an exemption before deciding not to obtain cover.

Vehicle insurance 

If your business uses vehicles for any purpose, you must have them insured. 

Other types of business insurance you should consider 

The following types of insurance are not legally required but are strongly recommended to protect your business from unexpected losses. 

Public liability insurance

Although public liability insurance is not a legal requirement for most UK businesses, it is often considered one of the most important forms of cover available.

Public liability insurance protects your business if a member of the public suffers injury or property damage because of your activities.

Many businesses discover that public liability insurance becomes essential not because the law requires it, but because customers, suppliers, landlords, or contractors require evidence of cover before agreeing to work with them.

For businesses that regularly interact with customers, visit client sites, attend events, or operate from commercial premises, public liability insurance should be considered a necessity.

The following businesses should invest in public liability insurance:

• Shops 

• Restaurants and cafes

• Mobile food vendors 

• Market traders 

• Pubs 

• Events managers 

• Taxi and transport 

• Child minders 

• Beauty specialists 

• Charities 

• Home trade services (electricians, plumbers, decorators) 

• Construction services

• Veterinarians 

• Cleaners 

• Delivery services 

Professional indemnity insurance

If your business provides advice, consultancy, design work, or professional services, professional indemnity insurance may be one of the most valuable policies available.

Unlike public liability insurance, which focuses on physical injury or damage, professional indemnity insurance protects against claims arising from professional mistakes, negligence, or poor advice. It helps cover legal costs and compensation claims that may arise should a client accuse you of causing them financial loss. 

Cyber liability insurance

Unfortunately, smaller businesses are increasingly attractive targets because they often have fewer security measures in place. As businesses become increasingly dependent on digital systems, cyber insurance should be a necessary consideration for companies of all sizes.

Cyber insurance can help protect against losses resulting from:

• Data breaches

• Hacking incidents

• Ransomware attacks

• Fraud

• Business interruption following a cyber attack

Business equipment and property insurance

Property and equipment insurance can provide cover if assets are:

• Stolen

• Damaged

• Destroyed by fire

• Lost during certain insured events

Directors and officers cover (D&O)/management liability insurance 

D&O protects managing officers within a business from claims that may be made against them personally such as mishandled information or errors in financial reporting. 

Do home based businesses need insurance?

While home based businesses may face fewer risks than businesses with commercial premises, they are not risk free. Many standard home insurance policies do not fully cover business activities. This means business equipment, stock, customer visits, or professional services may not be protected under your household policy.

If you operate from home, it is worth reviewing both your business activities and your existing insurance arrangements to identify any gaps in cover.

How much business insurance do you actually need?

There is no universal answer because every business faces different risks. Businesses should identify their most significant risks and ensure they have appropriate protection in place.

When assessing your insurance requirements, consider:

• Whether you employ staff

• The type of work you perform

• Whether customers visit your premises

• The value of your equipment

• The sensitivity of customer information you handle

• Contractual insurance requirements from clients

• Industry specific regulations

Insurance should be part of your business setup plan

Insurance is often most important for businesses during the early stages, when companies have the least capacity to absorb unexpected costs.

The right cover provides reassurance that if something goes wrong, the business has a safety net in place.

While not every insurance policy is mandatory, understanding your legal obligations and assessing your risks carefully can help you make informed decisions about the protection your business needs.

With clear preparation and the right information, registering a business and investing in its future with the right insurance cover can be a straightforward process. If you prefer a simplified, supported experience, 99p Company Formations offers fast, affordable incorporation services with optional add ons to help your business stay compliant from day one.

We offer full registration services that help you begin trading without the administrative hassle. Call us today to get started.