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Creating a Company
Contributor: Mike de Sousa, Director, AbleStable


If you're selling products or services as an independent creative professional (products born of your own creative activities), you might be self employed or employed as a 'freelance'. You may however wish to expand your business into a partnership, or limit your personal liability by incorporating a company. Here's your guide to the most important issues surrounding these business models.

This is by no means a comprehensive guide on setting up a business. It's aim is to provide an overview of many of the issues you'll need to consider when forming a private limited company.
You're strongly advised to carry out your own independent research as different rules apply depending on your country of residence. You're also be wise to seek the services of a lawyer before signing any documents of incorporation.

Different Business Models

Let's first consider what the difference is between the various ways you can operate as a creative professional.

A sole trader is employed by someone else for a specified period, that is, an individual or business may have commissioned you for a specific work. Perhaps they want a photograph, a new website, or a copywriter for a particular project. In this circumstance you'd have the ability to negotiate the terms of contract and payment with each client, and also to negotiate the terms of copyright. The freelance creative professional is however personally liability for the business should a client claim against you for a service or product not performing in the manner specified.

You may alternatively be in full time or part time employment as a creative professional. For example, you may be a designer who draws a salary each month for all the work you create in that role. In this instance your employer will define the terms of conditions and negotiate the rights with the client. While this circumstance often affords more security, the creative professional generally has less influence on the ownership of work that's been created. Liability however rests with the employer.

Finally, the creative may decide to incorporate a company. A Private Limited Company is a distinct legal entity. Think of the entity as a person. In your business dealings it is not you that deals, but you on behalf of your company. Unlike a public company, a private limited company does not offer its shares to the public and is not listed on the stock exchange.

Partnerships and Private Limited Companies

A Partnership is an agreement to share profits with others. It's usual in a partnership that the 'Members' assume personal liability for the business. It is possible however to create a 'Limited Liability Partnership' in the UK, but you'll need to check to see whether this option is available in your country of residence.

The main advantages of incorporating a company are:

The 'Members' liability is limited - in a partnership liability may extend to an individual's personal estate.
The death of a company member does not impact upon the business - in a partnership the death of a partner may force the partnership to cease.
The number of Members is unlimited - partnerships are limited in size.
Shares in the company may be transferred - a transfer of interest in a partnership may only occur with the consent of partners.
The introduction of capital is fixed by company rules - in a partnership it is a less formal arrangement.
Profits of a company are distributed by way of a dividend - profits in a partnership is counted as earned income

Seeking Advice

As you decide what best suits your needs, try to get professional advice from the following:

Accountants: keeping a record of all your financial dealings in the business is crucial, however you operate. A good accountant will also be able to advise on how best to deal with your particular tax system.
Bankers: developing a good relationship with your bank will ensure the smooth transfer of cash.
Financial planners: being a creative professional doesn't always go hand in hand with managing the financial aspect of running a business. A financial planner can help you work out a sustainable and realistic business plan.
Solicitors: a good lawyer is vital when incorporating a company. Each country has different rules relating to sole proprietorship, partnerships, and incorporation.
Surveyors: If you're renting office space you'll need an independent audit to ensure it meets all your requirements.
Estate agents: finding appropriate office space, dealing with landlords, letting fees, and arrangements.

Memorandum of Association

Every company must document what its business is by creating a document known as the 'Memorandum of Association'. New companies often use boiler-plate templates that only require the company name, and a few additional details to be entered. A word of warning though: read everything before you sign it, and be absolutely certain you are clear of the meaning and implications of anything you sign. When incorporating a company it's always advisable to seek the services of a lawyer.

The Memorandum of Association will usually detail:

The company name.
The location of the registered office of the company.
The 'objects' of the company - the company can only do what is authorized by the objects clause in the Memorandum.
The limited liability of the Members.
The amount of the share capital and its division into shares.

Setting the Foundations

There are a number of issues you'll need to consider carefully when setting up a Private Limited Company. Understand your Articles of Association which detail how shares are allotted, issued, and repurchased; what general meetings are required and for what purpose; the rules governing directors and the secretary; and the extent of indemnity for officials carrying out their duties on behalf of the company.

Every company must have a registered address, and it is usual that a company plaque is placed outside the office in full public view.

Meetings will be held where the Directors of the company discuss and agree resolutions affecting the operation of the company, and distribution and allocation of shares. Resolutions are carried by majority voting of the Shareholders.

Key Personnel

Here are the key personnel that make up the company structure:

Directors

Although the company is a legal entity, it requires that someone is authorized to carry out business on its behalf. These are known as Directors. A director need not be a shareholder and therefore may not necessarily be an owner of the company.

Shareholders

A Shareholder is someone who owns one or more shares in a corporation or company. A shareholder usually has a stock certificate which proves ownership. Shareholders need not necessarily be directors, but they do have a right to vote on important matters. Their influence on the company will be governed by the percentage of shares owned.

The Company Secretary

The Company Secretary is the legal guardian of the company and ensures that the rules and procedures of the company are being adhered to, and that formal records are kept of company matters including the administration of shares.

Company Accountant

It is very important that the financial accounts are audited by a qualified accountant. If for example the company accounts are not transparent and accurate, Members of an incorporated company will be liable for the consequences. Accountants will also be able to advise on the most efficient distribution of salaries and shares for tax purposes.

The Company Administrator

The day to day running of the company should be carried out by a company administrator. This position is not generally required by law but is advisable. Their responsibilities generally include: handling the company bank account; distributing salaries and share dividends; handling general inquiries; attending promptly to
company correspondance; drafting letters; and setting up meetings etc.

Conclusion

There are advantages to setting up a private limited company: the company can grow to a significant size, investment is easier to acquire, and liability is limited. For all these advantages however, it should be clear from this introductory article that forming a private limited company carries a number of costs and responsibilities. For some, the choice of incorporation is a sensible one, for others it is wholly inappropriate. Good luck in finding the best solution for your own personal circumstance.



     
       
 
Authors background

Mike de Sousa is the Director of AbleStable®. Mike has been commissioned as an artist, music composer, photographer, print and web site designer, and author.

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