First of all, do you need to be a company? There’s generally a little less admin involved if you register as self-employed and if you’re wanting to be a freelance practitioner - be it a stage manager, artist or theatre facilitator for example - it’s a good way to start out. I also heard something at a conference recently that resonated - ‘you haven’t got a business until you have a product & customers.’ So maybe before you take the plunge in to registering a company, have you got people willing to hire you or buy your product?
Here’s a guide we have about being a self-employed creative. The basics of what is covered here applies to being some form of company too. You still have registrations for professional bodies, still need insurance, and still need to pay your taxes on the invoices you send.
If you’re thinking about collaborating with others, a company may be a great way to fully legalise and formalise it, but you might also find a co-operative way of working or loose association of self-employed people working together a good route. You’re individually trading but might do so collectively under one marketing tool (like a trading name you promote), or out of the same studio perhaps - sharing rents, costs, profits or even work. It’s a pretty common way to start out and gives you a community to work with & support whilst doing your own practice.
There’s also something a little between both of these - a Limited Liability Partnership - but to be honest this is more often used by accountants or lawyers & similar professions, so we won’t be going into detail about this here.
Why would you register as a company?
- The limited liability - it doesn’t absolve you from responsibilities, but in short you have an extra layer of protection against debts particularly
- Perceptions - annoyingly some people will prefer to work with a company
- You’re working with other people and want a unified presence / invoicing process for your collective
- You want to borrow money as a group / company to fund your activity
- You simply want to completely separate what you’re doing from your personal affairs
These are just some of the possible reasons why it might be a good idea. There are plenty more! (Try Google)
It should be mentioned that of course with benefits come some disadvantages - or considerations - such as the need to produce annual accounts, perhaps in addition to your personal tax return. There is usually a cost to this and can vary usually from £400 for a small organisation to many thousands - although in my experience it’s up to £800 for an organisation turning over £150k and £1,100 for £250k. But it’s a professional service that depends on how long it takes - i.e. how complicated your business accounts are - 3 big invoices a year is much easier than hundreds of smaller ones. You will also need to cover insurance, meet company or charity laws and follow appropriate procedures. Regardless of how you set-up, there’s always going to be more regulations & administration than being self-employed.
And here is a short glossary of a few of the terms used throughout, are there any other words you would like clarification on? Just comment and we'll add them here:
- Dividends - are payments of the profits which a company makes out to the shareholders. In simple terms, if 5 people all owned 20 shares each (making 100 in total) and the company decided to pay out £100 in dividends, they would get £20 each. There's a tax free limit on dividends too; the amount can change but is currently £2,000 a year. Check out the HMRC website.
- Shares - the pieces of a company ownership (for a company limited by shares). Each share is a percentage of the company. If 5 shares are issued, each one is worth 20% of the company, if 100 shares are issued then each one is worth 1% and so forth. You can have ordinary shares, preference shares and various more complicated combinations. As well as dividend payments shareholders (the people that own the shares) usually have voting rights too - especially relevant with big companies.
- Personal tax return - If you're a director then it's a good idea to submit your own personal tax return each year to HMRC too (also known as the Self Assessment tax return). Some accounting firms will offer you this as a package if your only income is as director of the company. A personal tax return just allows you to say how much you've earned and what allowances you are claiming - for example a combination of salary & dividend payments. Here's the HMRC info.
- Turnover - this is the total amount of money your business / organisation makes. Generally for example you might make £80,000 in turnover in a year, you would then have say £70,000 in costs (office, staff, royalties) and this would leave you with £10,000 in profits. You may then have tax to pay on those profits, leaving you with an amount as profit after tax - which you could pay as dividends if you're a company limited by shares.
What sort of company do you want to make?
Let’s start with something which isn’t a company at all - a partnership. This is usually for profit and is a way of formalising a working relationship like the collective above - usually bringing together a group of self-employed people to make one partnership as an entity. But do note that these don’t enjoy some of the separation benefits that being a company brings.
There is also an unregistered charity - only relevant if you will turnover under £5,000 per year - See info on the Charity Commission/Government website. But that’s not likely to be something you plan on doing in the long term unless you really are just making a local community group.
Now let’s focus on registered organisations and the options you have...
For profit or social?
Yes that’s right - you need to decide your focus. You might want to set-up in a way that allows you to pay dividends - a share of profits - to the shareholders. This is a great way to raise some initial funds - by selling a share of your company to someone else. They’ll buy in and then be entitled to a share of any dividends declared. Let’s say you raise money by selling 10% of your company to someone in return for some cash. At the end of the year if you’ve made a profit you might say ‘Right we’re giving £10,000 back to our shareholders’ - the shareholder will be entitled to £1,000 (10% of the dividend declared). There are some exceptions to this and you can set-up preference shares etc. So again you can make things more complicated if you need.
This is likely to be a straight forward Company Limited by Shares. You will need to appoint directors - the people that run the company - and list your shareholders - who may not always be people who run it. You can still apply to certain funders like Arts Council England (but must be for a self-contained arts project that clearly benefits the wider public) and certainly for business finance, although most charity trusts and other funders won’t want to fund a for profit company. It’s very easy to register and you can be done in 20 minutes. Take a look at the Companies House website.
But now you’re thinking that most of what you do will have a social benefit? Well there are a number of options. Remember social benefit is pretty broad - it could be to do with the issues tackled (say homelessness), the way in which you tackle them (training unemployed people in theatre making skills), or simply that you want to be led by community need. You might tackle different issues at different times and experiment with various approaches - professional work, community work, partnership working and any other way.
Setting up a creative company with a social mind
Community Interest Company
This is a legal structure introduced in 2005, and has special features to support businesses with a community benefit. It’s basically a limited company with a few extras added on. To become a C.I.C., a test has to be passed that proves the business has a positive social impact, and isn’t just there to make the owners rich. If a business gains the title of a C.I.C., it has to follow certain rules and one of these is asset-lock. This simply means that the items and profits the company gains, can’t be completely given to owners or shareholders, and have to be invested back into the business or community. C.I.C.s can’t be used for political activities. You would register with Companies House and also be subject to the rules of the CIC Regulator. You can find out more on the Government website.
This is increasingly becoming the common format. That’s because it needs a board - but that could be a small board, and the people on that board can be paid for the work they do. You’ve got to be transparent and show your community benefit, but you retain control on how you work and what you do. Many trusts & funders recognise this as an entity working for the community so grant funding is available. But it should be noted that there are no special tax advantages given - it is almost entirely the same as another limited company. The big difference is that you need to file a report on your community benefit with your annual accounts every year. At the time of writing this has to be done by paper posting! But they are testing online filing and hopefully that will be normalised soon too (maybe 2019).
Company limited by guarantee
Companies limited by guarantee are often structures chosen by social entrepreneurs. They’re quite flexible, meaning they’re able to trade in different ways and spend their profits easily. The documents that decide the company’s goals may have social aims written into them, however these are not checked by a government organisation specifically. Companies House is the organisation that you register with to set up a company limited by guarantee, and provides lots of information about how to set up on their website (which includes online registration so it’s all pretty straight forward - although you may be best served with an online agent).
Company limited by shares but with a social objective
Here’s a curve ball. There’s nothing stopping you writing your Company Articles (governing document) to make you social but still limited by shares. Here’s a website that might help in this too: getpurpose.ly - It leaves some flexibility for raising funds, for future changes to how you work and is in itself one of the more flexible and easiest legal structures. Although do note as above, even if your articles highlight social objectives and you intend to self-contain projects etc, many trusts & foundations might not accept you straight away or may take some convincing. Here’s the company formation link again.
Now for a quick note about trading sociably but not as a ‘company’ at all. But as a charity (primarily)
This is an option if you know almost all your work will be for a charitable good. Of course, this opens you up to even more funders generally too. Although the biggest detractor is that you must have an independent board of trustees - these would not be employees who take a regular salary. As such you technically give over control of what you’re doing to someone else. Although it does depend on how you work with the board and how collaborative you can be - a shared vision may be absolutely fine for you.
Charitably Incorporated Organisation
This is a newer format of charity. It allows you to register only with the charity commission and is in itself an incorporated entity. This essentially means it is a ‘legal person’ for itself - i.e. a level of liability to the people running it has been removed - and also means it can enter in to contracts itself as a charity.
However, trading must remain only in direct line with the charity’s objectives – i.e. It would be difficult to run a shop in order to fund its core services in arts workshops for example. But charging participants for the workshop is absolutely fine.
You will need to meet certain conditions in order to set one up, these include:
- No minimum threshold for turnover (worth flagging as below options are £5k)
- Have a charitable purpose
- Details on how you run your charity for public benefits
- Have an intended name, bank details & contact details
- Have a governing document
- Ideally proof of income - a pending grant award letter for example
Here’s a few more details about the requirements, and this links over to how you create your governing document too.
Charity with a Company Ltd by Guarantee
A more traditional form of charity is one that is registered with the Charity Commission & as a registered a non-profit Limited by Guarantee as above (commonly known as a charitable company). This means you are regulated by two bodies - Companies House and the Charity Commission, so subject to company law & charity law. To become a charity from a Limited by Guarantee you fill out some paperwork - form IN01 (downloaded here or use an agent online from the official list) and meet their conditions (as above for a CIO as a basis), and then at the end of the year you provide a report to both including your financials.
So you generally operate as your Ltd by Guarantee but get the benefits of a charity registration - like tax exemption from corporation tax & ability to access gift aid on donations etc. You would always list yourself as ‘XYZ Creative Company. Registered in England & Wales with company number 00001234 and charity number 0001234.’ (Or indeed Scottish etc equivalents).
Charity with a Company for Trading
So now you might have one of the two above charity formats, but you also want to run another business that supports your charity? The easy example is all the charity shops out there raising money to support research into various conditions.
To summarise and simplify what this means; you would create another company which is owned by the charity and all the profits you make are donated to the said charity. So it trades, it earns money and it pays its costs, then money left over may be reinvested for growth but also donated to the charity, and when set-up right this donation becomes tax free, and you may not pay any corporation tax if you’ve passed it all over. But I should stress that this isn’t automatic and an accountant would need to help you. Registration is as above for a charity, and then for another company limited by guarantee.
These organisations are usually used for co-operatives, where the business is run democratically. This means that the members of the organisation all vote on how things are run and which decisions are made. Often they are Industrial & Provident Societies and these businesses are generally regulated by the Financial Services Authority too. Think about The Co-Operative Group (UK) or Nationwide Building Society for two types of these.
If you’d like to know more about setting up a society then this handbook is the place to get more detail, it’s not something we’re covering here: https://communityshares.org.uk/resources/handbook/introduction-1
More useful links…
A recent blog from Companies House summarises some of the general points about legal structures too. You can find it here. Or simply visit the Government web page on setting up a social enterprise.
About the author
Emrys is a project manager by trade and has worked for more than a decade in stakeholder engagement. In that time he has set-up or been a director of companies Ltd by Shares, Ltd by Guarantee, CIC, CIO, Collective Partnership, and traditional charities. He wrote the Social Enterprise Training for the Department for Business, Innovation & Skills backed Catalyst Consortium in 2012 which had a national rollout supporting young people in to social enterprise. Emrys has also judged at every UK level for Young Enterprise, is a Fellow of the Royal Society of Arts and became the youngest ever full member of the Institute for Leadership & Management back in 2011. He also holds a degree in business management.
This is not legal advice
There are a number of factors to consider when becoming a business. There’s tax planning, various insurances, legal & regulatory requirements in various industries, best practice and moral considerations. The above summary of the available types does not constitute advice for your particular situation and you should consult with legal & financial experts if you are unsure which to go for. Any decisions are made at your own risk. Also, this is based on experience in England & Wales. Other jurisdictions will vary. Emrys, nor Voice, can take any responsibility for actions taken using the information provided.