Setting up a creative business can seem daunting, especially if you have no prior experience. And for people like me, starting out in the music or sound design industry – or any creative industry really – it can seem like it is the last thing that we want to do, as it doesn’t seem to have much benefit before the contracts start coming in. But if you can summon the courage to bite the bullet and start that learning curve, things will become clearer, faster than you would think.
I have recently taken the plunge and set up my own limited company, Jake Basten Audio Ltd. to handle selling all the products and services that I will make and supply in the future and I feel so much better for it. My confidence in my own brand has increased and I feel like there is now a path to follow, simply by legitimising what I was already working hard at doing.
I thought that it might be useful to my fellow creatives to share what I have learnt, so that they can get their house in order.
First of all, I’m based in the UK, and while much of what I will say here will probably translate well enough to situations in other countries, I don’t have the knowledge to provide information or universal terms for the US or EU systems. Also, I am literally writing this as I am doing it so I may make mistakes or not provide all necessary information. I would encourage you to do your own research in top of reading this if setting up your own business is something that you are seriously thinking about doing.
The process for setting up your business is basically making a string of fairly minute decisions, which all slowly add up. The first of these is what type of business enterprise are you going to register as.
This link contains all the information that you need to make that choice and also is the place to start if you want to register: https://www.gov.uk/set-up-business
There are three options for this: Sole Trader, Limited Company or Partnership. I am going to ignore Partnership and assume that at the beginning you are going to be doing this on your own.
Sole Trader is an alternative term for Self Employed. It’s a simple arrangement where you are your own boss and you simply have to tell HMRC every year how much money you earned and how much tax you will need to pay via Self Assessment. You also have to pay two kinds of National Insurance (Class 2 and Class 4), but there are exemptions to this if your income is low. Which? provides a useful NI Calculator.
When you are a Sole Trader, the amount of tax that you pay at year end is based on your Net Profit (income after costs) rather than your Gross Profit (basic income). This is good, because if you invest in your business by buying plugins, software, musical instruments etc. or if you use public transport or a car for your work, you can claim all of these costs back in your Self Assessment so that the amount that you have to pay tax on reduces – these are called your expenses.
So, there are a few things to do if you go the Sole Trader but nothing earth-shattering. The best thing to do is get yourself a spreadsheet, and log every transaction that is business-related. When you make a sale, log it; when you make a purchase for the business, log it and keep the receipt somewhere.
If you have made a purchase already before starting the business, but it was intended for business use, you can even claim that back as pre-trading expenses for up to 7 years, as long as you have the receipt.
If you have another job alongside this business, a slightly annoying chink in the system, is that HMRC will ask you to provide details of all of the money that you have earned that year on your Self Assessment, even if you are paid via PAYE through your employer, so make sure you keep all of your payslips as you may have to produce them if asked.
The downside of being a Sole Trader is that there is no separation between you and your business. This means that if you get in to trouble, all of your personal assets could be used as collateral, including your home.
The other route to take is to make a new Limited Company.
This is the route that I took; I couldn’t really tell you why I made that decision at the time but it just felt like it was laying the groundwork a bit more by making something separate from just myself.
A company is an entity in its own right, and when you make one, you actually become a Director, which is an employee of the company, so there is a separation there, both financially and mentally.
Financial separation is actually one of the main benefits of having a Limited Company: the ‘Limited’ bit means limited liability, so if the company gets in to trouble for any reason and for example if it has some bad debts; the liability of those debts is solely on the company and does not extend to you or any other employees of the company.
What Do I Have To Do?
To begin with, you have to incorporate the Company: give it a Company Name and optionally a trading name, register an address for the Company’s main office, appoint the Director’s (you and anyone else involved), delegate shares to the shareholders, tell the authorities what the purpose of the company is, and give details of the people with significant control. I know this all sounds very complicated, and your eyes probably glazed over just reading it, but don’t worry, the Government have actually made this very easy. Visit Companies House to incorporate the company, and it will take you all the way through. Also, most of the steps detailed above are very simple if you are the only person involved, as you will be the Director, the shareholder and the person with significant control. I managed to do all of this within about an hour and ended up with a new company two days after completing the forms.
The first year will always be the hardest as you have to learn how the system works. At year end, the company is legally obligated to provide full statutory company accounts to HMRC, as well as an annual return with Companies House. The company accounts to HMRC are similar to the books that Sole Traders provide in their Self Assessment however they only refer to what the company has made, and not how much you have been paid as an employee of the company.
Put very basically, if the company makes profit it has to pay Corporation Tax on that profit at the end of its financial year. Of course just like the Sole Trader, the Company can offset its profit against its expenses or whatever it invests back in to the company, for example by buying office furniture, instruments etc.
As with being a sole trader, you can claim up to 7 years worth of pre-trading costs in your first tax return.
Spreadsheets – Oh Yeah
Sorting out your accounts for a limited company is a bit more complicated than as a sole trader because there needs to be a record of literally everything that happens.
You need to create:
- An asset list of all of the items that the company owns, and how much each are currently worth (including depreciation each year), in case the company ever needs to sell it, or if it is no longer worth anything, write it off the books.
- A list of liabilities (company debts) – when you start this will probably be limited to a Director’s loan that the company owes you for the pre-trading expenses, but could also include bank loans etc.
- If you are running a products business, you will also have to keep a stock list, to see how much cash you have tied up in unsold items – this is probably not that likely if you are a sound designer or other creative media business as our products are often digital so we don’t necessarily ‘keep’ stock.
These things are important because they provide the numbers for important company documents that will be needed at year end when you file your accounts to HMRC. These documents include:
- The Profit and Loss (Income Statement) – this is a summary of how much money the company has made (gross income), how much it has spent (expenditure), and the net income (gross income – expenditure). It’s a basic measure of how healthy the company is.
- The Balance Sheet – checks how much the company is worth. You log the company’s assets – including the cash in the bank, all of the furniture, software, instruments, studio gear that the company owns etc; the company’s liabilities (what It owes); and the company’s cumulative profits since it was incorporated, so that you end up with the Equity of the company.
- Cash Flow – provides deeper checks on the company’s finances. It logs how much money has been taken this year, how much has been spent and what on. It shows you important information, such as are you paying yourself too much or not enough, are you spending too much on plugins?!?! (probably), or did the bulk of the company’s income come from sales or investment?
The first thing that you must do when you set up your company is to get a dedicated bank account for the business and put it in the business’ name. This makes logging business expenses much easier than panning through your personal accounts and trying to remember when it was that you bought that last reverb plugin. It also provides that further separation between your personal funds and the company’s finances.
I would also certainly recommend getting some software like Wave Financial or QuickBooks so that you can log all of your transactions. Personally, I like Wave – it is great for its searchable reporting functions and simple layout. I log my transactions from business account as they happen, but both of those sites also have a tool that allows you to join your bank account to it and all transactions will be logged automatically!
The main aim of setting up the business is of course so that you can afford to pay yourself some of the money that the company earns. Remember though that you have to log any earnings that you make from working for the company as an outgoing from the company, and as a personal income as part of an employed self-assessment.
There are a couple of main ways of paying yourself as a director of your company – PAYE or as an end of year dividend.
PAYE is the same as you would get at your day job working for someone else, and it would include all the normal payments such as income tax and national insurance. This doesn’t end up being very tax efficient though, as you could be paying more deductions than you have to. However, you can take up to around £8000 a year without paying tax or NI.
Dividends are a good choice when you are starting out, as you can claim up to £2000 a year without paying tax, however you can only take a dividend out of the company’s post tax bill profits, so it could be likely that the company can’t afford to pay you this way. If you want to pay yourself more than £2000 a year, dividends start getting very expensive because you have to pay a high tax rate on the dividend, and that is after the company has already paid corporation tax.
Pay Someone Else To Do It!
If all of this sounds overwhelming, don’t worry too much. This took me about 6 months to get my head around, and I have listed pretty much everything that I have done to get to where I am in here, so just follow suit and you’ll get there.
Still, if you feel that you aren’t the type of person for crunching all the numbers or that you aren’t up to doing all this on your own, you can employ an accountant to do all of the tricky bits for you. From my research, most company accountants started at about £500 a year.
I successfully filed my first tax return last month and HMRC seem to have accepted it without any problems so I’m pretty confident that I have all the bases covered now, but if you have any questions ask away or if I’ve missed something huge please let me know and I can fill out the information here – I hope this has been useful!