Do you need a formal structure?
Unless the cinema is going to become an integral local authority facility you will need to decide how the cinema is going to be owned and managed. Some local cinemas operate as unincorporated associations i.e. an informal group of people who come together to set up and run a cinema. They undertake all activities as private individuals, applying for grants and entering into contracts in their own names. For some purposes, particularly when starting out, this is probably a satisfactory solution and you may not need to consider incorporation as a company until such time as there is a very real prospect of the cinema becoming properly established. Informal associations can still benefit from the drawing up of a constitution that outlines their main objectives and the way in which business will be conducted. It may also be worth thinking about registering as a charity at some point. Charitable registration is open to both constituted companies (limited by guarantee, see Setting up a Limited Company below) and unconstituted organisations. Both charity and company registration can be expensive and time consuming and it can be problematic if you wish to dissolve your organisation in the future, so careful consideration should be given to the need to register.
Setting up a limited company
Registering as a company can offer advantages although this has to be balanced against some of the costs. To do so creates a legal separation between personal and business finances, limits liability in the case of financial (and other) disasters, can give credibility to one’s activities and can be used to regulate relations within partnerships in a corporate rather than personal capacity. In general, the larger the projects you intend to embark upon, the larger the amounts of money you will need to complete them, the more useful it becomes to operate as a limited company. If you are entering into contracts or agreements with organisations such as public sector funding bodies, suppliers, banks and so on, being a registered company can give you not only credibility but also some additional protection against error or sharp practice. Most particularly, it is the company, not you personally, which must fulfil contracts or meet liabilities: as long as company directors have acted properly and responsibly, your liability for financial and other penalties can be limited. It is also worth noting that most National Lottery Distributors and some other funding bodies do not make grants to individuals.
The Companies Act 2006 lays down strict regulations governing what companies may and may not do. The Act is enforced and monitored by Companies House. It imposes reporting and operating restrictions which some individuals or groups may regard as onerous. Much of this is to do with the frequency and administration of company meetings, and the filing of annual results and auditing of accounts. Failure to file the appropriate returns and accounts on the due dates can lead to quite substantial fines. If you think a limited company structure might be of advantage, the first thing to do is to contact Companies House for its guidance notes on incorporation and registration and read them thoroughly. These are invaluable: without them you will invariably get something wrong. Only form a company if you are certain that it is the best option for you and you are confident in the people you wish to work with. A company must have at least two directors – you cannot form one as an individual. If in doubt, seek advice from a solicitor, company formation agent or similar professional.
As to the actual process of creating a company, there is a standard registration fee (currently £15 online or £40 by post) for registering a company with Companies House.
However, you may also need professional help to draw up your Memorandum and Articles of Association which give details of the company, its activities and how it will operate as a legal entity. Alternatively, the gov.uk website has a template Memorandum and Articles of Association online. Companies House takes all of this very seriously, even to the extent of restricting the use of certain words in company names. To all intents and purposes there are two options for the sort of company you might form: limited by guarantee or limited by shares.
To simplify greatly, a company limited by shares would have the objective of trading in order to make profits to distribute to its shareholders. A company limited by guarantee is the format available to charities and other groups which do not seek to distribute any profits to company members.
Alternatively you could also look at forming a Limited Liability Partnership (LLP). You must have at least two members and each pays tax on their share of profits but the difference from an ‘ordinary’ business partnership being that none of the partners are personally liable for any debts the business can’t pay.
Forming a charity
Operating as a charity can bring benefits to an organisation and may assist with fundraising. Charities enjoy exemption from corporation tax on profits, relief from business rates (rate relief), Gift Aid relief on donations from individuals, stamp duty land tax relief on freehold property and leases, and can bring credibility in the eyes of funding bodies, other organisations and the general public. It can also be easier to raise funds from certain sources including grant-making trusts and local government. While the Charities Act 2011 restricts the freedom which charities have to trade beyond the strict remit of their charitable objectives, lost flexibility can be restored by the creation of a trading company operating outside the scope of charity law but covenanting back profits.
The legislation governing the establishment and activities of charities is, however, as stringent as that governing limited companies. The Charity Commission maintains a register, investigate misconduct and abuse, and otherwise administer the charities sector in England and Wales. The law is different in Scotland where, in order to obtain tax and funding benefits your organisation should be registered with the Inland Revenue as a ’Scottish Charity’. The Scottish Council for Voluntary Organisations (SCVO) can supply a Guide to Constitutions and Charitable Status that includes model documents that groups can adapt for their own use.
There are separate rules governing the published annual accounts produced by charities known as SORP (Statement of Recommended Practice) and it can be costly to employ a specialist accountant to draw these up. Under law, charities exist to fulfil a specified purpose and are, by definition, voluntary organisations: that is, the board of management must not be remunerated (although staff can be paid). The definition of charitable purpose breaks down into four ‘heads’ of charity: relieving poverty, sickness or the needs of the aged; advancing education; advancing religion; other purposes beneficial to the community (e.g. advancing the arts and culture).
Most charities active in the arts or media operate under the educational or other purposes beneficial to the community ‘heads’. It is also illegal for the trustees of a charity to benefit from it financially. For example, a trustee cannot also be an employee of the charity. It is possible to be prosecuted for running a charity improperly.
The Charity Commission publish a free booklet (CC21a), Registering as a Charity, which gives advice and explains the law. There are more than 160,000 registered charities already operating and it may be possible – or even desirable – to join forces with an existing organisation. The Register of Charities or Charities Digest both give information on existing charities. The Office of the Scottish Charity Regulator (OSCR) provides a similar service for Scotland.
For full details about setting up a charity and the responsibilities of running one, refer to the website of the Charity Commission: www.charity-commission.gov.uk/Start_up_a_charity/default.aspx
Summary of key points from Chapter 5
- Registering as a company is relatively straightforward and can buy credibility with funding bodies and suppliers of services as well as giving limited liability to its members.
- Before you register as a company and/or charity, be sure you are absolutely ready. If your project does not proceed it can be tiresome to ‘undo’ registrations.
- The preparation of annual accounts is regulated for both companies and charities and you will need to employ a specialist accountant that may be costly.
- Read the guidance issued by Companies House and the Charity Commission prior to registering a company or charity.
- Getting your memorandum and articles right is crucial – consult a solicitor if you have any doubts.
- Make sure you are fully aware of the legal duties and responsibilities of Company Directors before becoming one and make sure others are properly briefed.