Things that can go wrong in your limited company

Many people get the idea that they should be a limited company and operate their freelance role as a musician, actor, singer, dancer a loads of other roles in the arts & entertainment industry. They are under the impression that all they need to do is carry on as they did as a self-employed person but with a different bank account.

It is not that simple. You need to understand the legalities of having a limited company and that includes complying with the 2006 companies act, and other related legal works. You need to be aware of changes that will be coming down the line – do you know how the proposed Economic Crime and Corporate Transparency Bill is going to affect you?

These are the problems that have been passed to be to get fixed – some are easier than others:

1. No company secretary on the company records and you have a family to support.

If something happens to you as a director, there is nobody that can help close the company to the best outcome for the family. It ends up in the hand of lawyers and potentially all funds and assets go to the crown – not the TV series I hasten to add.

2. Shareholders were created when the company was set up, and as time goes by, they are not needed or forgotten about.

If dividends are issued, they have to be shared, and what can happen is that the original shareholders are not considered or attend meetings. The only way around this is for the shareholders to be bought out. This then is reported on the share transfer form and eventually back to companies house as part of the confirmation statement.

3. No company bank account has been set up and operating through the Directors personal account.

Ouchie. Although the Director may be the shareholder, the company is a separate legal entity, and the two should not be muddled up.

4. No payroll system.

The company may be a side hustle so not need for payroll. There are three legal ways to take money from the company and anything outside of this is treated as a loan from the company to the director which can cause a heap of tax issues:

a. salary so you need to have a payroll scheme set up with HMRC;
b. refunds of expenses paid by the director that should have been paid by the company (be aware of taxable benefits in kind if this happens);
c. Legal dividends which are calculated from the distributable profits.

5. Living off the company bank account.

So often people think it is their company and their money and pay for all their personal stuff with the company bank account eg shopping for car running costs, school fees, and ATM cash withdrawals. Again, this adds to the Directors loan account that needs to be repaid back to the company

6. No accounting records and just doing accounts from the bank statement on the cash basis.

This is not in accordance with the law. There are fines and a penalty up to £3,000 may be charged for each failure to keep or to preserve adequate records in respect of a return or in respect of a claim made other than in a return. For this purpose, there can be only one failure for each return or for each claim.

7. Created the wrong type of company

The default is a limited company by shares, but you may have meant to set up a limited company by guarantee. I have seen this happen, but companies house don’t have the teeth to reject accounts and require directors to fix this issue – well until the Economic Crime and Corporate Transparency Bill come into force.

8. Not filing the confirmation statement on time.

If left for a period of time, the company can be struck off the register and all assets then belong to the crown. It is a very expensive process to fix this and in effect buy back your company.

9. Not filing your annual accounts with Companies House and Corporation Tax return with HMRC & paying the bill.

This also leads to a strike off of the company from companies house as well as a variety of penalties from both organisations. It is separate from filing the confirmation statement so don’t fall down the trap that you have filed one, so that’s it.

10. Filing zero accounts as you don’t know what figures to complete.

Again, Companies House does not have the bite to look at this and many people don’t want to pay an accountant to file the correct figures as at the moment there is no real comeback. The issue then comes if a person wants a mortgage and needs these numbers, or somebody starts to dig into the workings of the company

11. Not sending accounts and corporation tax returns to HMRC even if the company is dormant. Don’t rely on the link between companies house and HMRC as sometimes it fails. You can call the HMRC helpline and register that the company is dormant, and they can set that status up to 5 years, so no need to report to them. You will have to do companies house though.

12. Not understanding if the company went over the VAT threshold.

A big dollop of poop hits the fan when this happens as it also shows that proper accounting records are not being kept.

13. No accounting system in place so lose track of records, which makes filing accounts etc quite hard.

14. Not paying over your PAYE/NI bill as part of the payroll process – if of course, you have payroll.

15. Being a sole director and therefore legally not able to make decisions for the company if the model articles were adopted and not changed.

Classical Musicians & Opera Singers, like any creatives, maybe more comfortable expressing themselves through music than numbers.

Therefore, managing finances, budgeting, bookkeeping, and dealing with taxes can be overwhelming, requiring the help of a skilled accountant who understands the peculiarities of the music industry. The learning curve for a musician transitioning into a business owner role can be steep, and balancing their artistry with business management can become a juggling act. If any of this seems familiar, then maybe get in touch.

We do offer a “get me out of poop” package. Just depends on how deep the poop is…