How to set up a creative business

Setting up a business can be an intimidating challenge for creatives, especially for the lack of business education they receive while studying. For this reason, The Sarabande Foundation recently hosted a business talk with law experts to give you the low-down on essential bits of information. Hayley Cross from Mischon de Reya and Ben Hooper from Litica headed the panel, who between them have extensive experience and knowledge of law, accountancy and business finance. We made a break-down of seven takeaway that are crucial to know to set up as a sole trader or start a limited company. Useful links to resources can be found at the bottom of the article.

STARTING IN BUSINESS

The easiest way to set up a creative business is to operate as a sole trader, as this structure has less formalities and reporting obligations than starting a limited company. Sole traders are self-employed for tax purposes, and taxed on profits – not on income. You'll need to submit a self-assessment tax return – a document that details the business income, expenses, and the tax owed or refund – and maintain records.

If your earnings surpass £1000, you must register with HMRC within the UK and file a tax return online.

Separate your personal and business bank accounts! “Banks really don’t like business coming over personal cash. Separate them for record keeping, so you can be absolutely clear what transactions relate to your business and what relates to you personally.”

BUSINESS STRUCTURES: PARTNERSHIP

If you and other people decide to start a business together, you’ll probably want to embark on a formal Partnership. If you don’t want any problems, it’s crucial you have a partnership agreement; otherwise the Partnership Act of 1890 will apply by default, which makes sure profits are shared equally, and that partners cannot retire or be expelled. Within the Partnership structure, it's mandatory to file an Income Tax Return.

Despite how great it could be to work with a close friend, there is a downside to this structure as there is no legal distinction between the business and the individual owners due to the joint and unlimited personal liability. In other words, if your partner gets in financial trouble, then you and your business are going down together. That is why it’s recommended to seek advice from legal and financial professionals to ensure the partnership agreement is clear.

BUSINESS STRUCTURES: PRIVATE COMPANY

If you are ready to take on more responsibility, it might be the right time to change from a sole trader to a private limited company (LTD),. With this structure, the company will be a separate legal entity to you as an individual and will be owned by its shareholders and managed by its directors. Take comfort in knowing: “If something was to happen to that entity, it can be closed down and provide you reassurance in wrongdoing as a director. Effectively, you wouldn’t have the liability of that company, so it can be a really useful structure when thinking of setting up a business.”

This structure allows the business to establish itself as a legal entity with the ability to own property, enter contracts, assume liabilities independently and allow equity funding – a method of raising capital for a business by selling ownership shares or equity in the company. In comparison to the sole trader structure, as a private company there are more financial obligations which include preparing financial statements, complying with Accounting Standards (financial reporting), the Companies Act (legislation that governs the formation, operation, and dissolution of companies), and annual accounts. Profits will be subject to Corporation Tax, requiring a separate return. By then, you’ll likely want the involvement of a tax advisor.

Directors responsible for running the business are taxed as employees. Shareholders, who own the business, face taxation on dividend income and capital gains through self-assessment. It’s advisable to have a shareholders agreement detailing their rights and obligations.

FINANCING

Finding money for your business can be tricky if you don’t have any savings or can’t loan money from friends and family, but you can always try to find external investors.

Consider exploring options such as Angel investors (individuals who provide financial support, often in the form of equity capital), venture capital (financing provided by professional investors), and grants (funds provided by a government, organization, foundation, or institution).

If you want to attract these investors, you can lure them with tax reliefs like the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS), which makes investing into a young business more appealing. For this, you may have to value your business, as investors who go down this route typically look for a proportionate share. Believe in yourself and don’t settle; seek for investors who bring more than just capital to the table, make sure they bring skills and networks. “Once you give equity to an investor, it is almost impossible to get it back, so please don’t do that lightly.”

Keep in mind that external investment is regulated under the Financial Services and Markets Act in the UK, which ensures market integrity, protects consumers, and maintains financial stability.

“Law doesn’t have to be done by lawyers – discuss everything at length with the people that you are doing it with, and write down what you both expect on a piece of paper.”

BRAND IDENTITY AND PROTECTION

Choose your business name wisely from the start to avoid legal and rebranding challenges. Make sure it is distinct from others, doesn't contain offensive or sensitive elements, and complies with legal requirements. Once you are ready, you can register your trademark with Companies House (an agency in the UK responsible to ensure the accuracy of corporate information.). By the way, you can have a different trading name, and if you are a private company, you must include ‘limited’ or ‘ltd’ in your name.

In order to protect your brand name and logo, make sure to trademark them in the country you operate or register them internationally.

“It’s really important if at some point you are looking to get investment, investors are going to be really interested in the ownership of your IP (Intellectual Property), as effectively that would be a lot of the value of your business.” So be careful when hiring contractors; make sure you have it in writing that the company owns the IP.

It’s safe to say, copyright automatically protects original creative works, so you can relax about that. It’s very important, however, to clarify ownership and administrative rights in social media, it can get dirty if there are multiple stakeholders.

BECOMING AN EMPLOYER

As you grow your business you’ll likely need extra hands to bring your creative vision to life. Don’t be an irresponsible boss and read carefully. You must register with HMRC’s PAYE (Pay As You Earn) scheme and handle tax deductions on each pay date. It’s easier than it sounds; we’ve attached a link below where you can do it.

Auto enrollment: You are required by law to make a workplace pension scheme available to all employees and make a contribution (3% since 6 April 2019). As an employer, you must pay National Insurance at 13.8% on salaries, with an employment allowance of up to £5,000. Don’t forget this is 2024: “There is no such thing as cash in hand, those days are gone.”

If you want to attract and motivate employees, offering equity and tax-efficient schemes like EMI (provides a tax-efficient way for employees to acquire shares in the company) can be beneficial to the growth and success of the company.

Have clear employment contracts. Confusion between contractors, employees and freelancers could lead to legal consequences. Investors scrutinize workforce structures during due diligence – the investigation carried out by an individual or entity before entering into a business transaction or making a significant decision.

VAT

Once your business reaches a certain size, with sales surpassing £85,000, you must register for VAT with HMRC. This means you are required to add a 20% charge on top of the price for your goods and services, collecting this on behalf of HMRC. The advantage of being an HMRC-registered business, is that you can offset the VAT you've paid on materials and services against what you've collected, effectively receiving a discount on your costs. It's crucial to understand the impact of charging VAT, especially depending on your customers. If your clients are other businesses registered for VAT, they can reclaim the VAT, creating a mutually beneficial situation. However, if your customers are consumers, they bear the cost.