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.
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