Someone recently emailed me and asked me these questions:

1) How did you setup your business? Limited company? Did you have to do anything special with inland revenue because your sales are online / international?

2) How did you manage your books? Was it simply a case of keeping bank records for transactions + royalties?

3) Did you always pay yourself a wage from it – and if so how did you go about doing this?

I’ll answer these from a UK perspective but some of the information should be relevant to setting up non-UK companies too.

1) Setting up a Limited Company

I set up my company as a Limited company called Jake Birkett Computer Solutions Ltd. in October 2002. This was so that I could supply IT consultancy services and contract programming to other businesses. I now use it exclusively for Grey Alien Games which is a “trading name”.

To set up a company you have to file various forms with Companies House, but I hate all that form filling so I used a 3rd party that did it for me for £90, all I had to do was fill out an online form. Still, to fill out the online form correctly may require an accountant’s advice (more on that later). Also once per year you have to file an “Annual Return” to Companies House which costs £15 if you do it online. To set up a Limited Company you need TWO staff members, one can be you (the Director) and the other could be a family member or associate who doesn’t actually need to do any work (the Company Secretary).

VAT registration

If your company is not VAT registered then you do not need to do anything special with HM Revenue & Customs (this is the new combo name for Inland Revenue and HM Customs and Excise which were always two separate things). However I voluntarily VAT registered even though my income was below the £67,000 threshold where registration is mandatory. This was to look more professional to other UK business (when I was doing consultancy, although it’s irrelevant now I sell games) and also to write off any VAT incurred on purchases as an expense – meaning I claim it back from the government once every 3 months (this is pretty cool as I save 17.5% + about 20% tax on games and electronics that I buy for my company – yes games, if you write games as a living, then buying games for research is a valid expense).

Being VAT registered means that any games you sell on your own website using say Paypal have to include VAT and you must log the amount of VAT from each sale and declare it every quarter to HM Customs and Excise. However if you use a 3rd party payment processor like BMTMicro, Plimus or Share-IT, they actually collect the VAT for you, along with their fees, and just send you the remainder, so that’s really easy (no extra paperwork). Furthermore, if you sell your games on portals and receive royalties, the portals will deal with the VAT (if any). Besides because the money often comes from the US, there is no VAT on it because UK companies cannot charge VAT to companies outside of the EU and when you receive royalties it’s the same from an accounting point of view as you invoicing that US company for the royalties due even though in practice you never actually make an invoice. It’s a convoluted issue, so if in any doubt, ask an accountant – I’m not a qualified account so please take everything I say as “advice to the best of my knowledge” not “gospel”, thanks!

Self-Employed

Finally, if setting up a Limited company seems like too much hassle then you can just go self-employed (as an individual), which costs nothing. You’ll have to keep basic accounts i.e. Money coming in (royalties/invoices etc) and money spent out (for business expenses etc). Keep this up to date then at the end of the year fill out a tax return. Basically they’ll look at your profit (i.e. income – expenses) and charge you however much tax you should legally pay (around 23% unless you are raking it in). You might want to hire an accountant to help with this the first time…

2) Managing your accounts

If you run a Limited company you are legally required to submit annual accounts to Companies House and fill out various tax forms for HM Customs and Excise. It’s a minefield and one slip means that you could lose a metaphorical limb. That’s why I hired an accountant.

Before setting up my company I went to a local recommended accountancy firm (Donovan Atyeo) and spoke to them about my plans. They gave me a free initial consultancy and answered tons of my questions and advised me on the best way to proceed. I was so confident in their advice that I hired them to manage my accounts on an ongoing basis and they have done a great job ever since. It costs me about £500+ per year to do this which may seem like a lot of money but I look at it like this:

– They have saved me tons of money by making sure I get maximum benefit from the way the system is set up. I’m not talking about “loopholes” or anything dodgy, just how to make sure I don’t pay too much tax and that I claim back every penny I can etc.
– I really hate filling out long-winded financial forms that I might make errors on. They do this for me and probably way quicker than I could. I see this as money well spent. My time is far better spent making MORE money programming games. Remember that! It’s tempting to do everything yourself (graphics, music/sound, accounts, marketing etc) but you’ll be spreading yourself too thin. Do what you are best at and delegate the rest.
– They have probably prevented me getting fined or paying interest by failing to send off the correct forms at the correct time.
– I got lots of business from them sorting out their computer systems and those of their associates 😉

They also deal with my PAYE (more on this later) and my personal tax return and helped to advise me about tax matters with regards to moving from the UK to Canada. Now that I’m here they are acting as the registered address for my company, which means that they receive all important documents and bank statements on my behalf.

Book-keeping

Note that my accountants don’t do my day to day book keeping for me, they just summarise and check everything and send off the correct forms. I keep detailed spreadsheets of all my business transactions which I supply to them at the end of the year. Some people hire a book keeper to do this part but I enjoy it as I can see how well I’m doing instantly. It’s really important not to fall behind if you keep your own books. Here’s what I keep records of:

– Debtors (Money coming in. Dates, amounts (Net/VAT/Inc. VAT), Company, Reason etc)
– Creditors (Money going out. Dates, amounts (Net/VAT/Inc. VAT), Company, Reason etc)
– Balance Sheet (This is a summary of Debtors and Creditors and PAYE, great for a quick overall picture including an estimate of my annual tax liability).
– Cash Flow (This logs money in and out of my bank. Great for seeing at a glance how much cash I have available for dividends or big bills etc).
– VAT Input/Output (summarises all the VAT from Debtors and Credits so that I can see how much I owe HM Customs and Excise each quarter)
– Mileage (Logs miles driven or cycled so I can claim a tax benefit for them).
– Parking (Logs all parking costs to be claimed back)
– Director’s Current Account (logs all money I’m owed by the company for expenses I used my own money on, and when I paid myself back).
– Dividends (Logs all dividends paid to myself)
– Assets (Keeps track of all new assets over £50 and all “disposals” which is assets sold or thrown out).
– Utility Bills (Because I worked at home I was able to claim a portion of my utility bills (phone, Internet, heat+light, and even council tax and mortgage interest more recently)).

Phew that probably seems like a lot of things right, but once they are set up they only need the occasional addition. I tend to add things as they happen and double check everything once a month. I have a checklist to remind me what things I need to do on a monthly basis. If that month falls on the end of quarter there’s more to do, and at the year end I have to check everything is good and send it all to my accountants.

3) Paying yourself a wage

If you pay yourself a wage from your company you have to use the PAYE system. It’s pretty complicated so I got my accountant to handle that. Over the life of my company I’ve paid myself (and the company secretary) different amounts depending on how well the company is doing. I’ve never paid a very big salary because I prefer to take most of the money out of the company via Dividends. In the past there was a tax advantage to doing this but the advantage has moreorless been removed now by the government (bah!)

You shouldn’t pay yourself dividends every month instead of a wage otherwise it may look funny to HM Customs and Excise, so quarterly is probably the most frequent you can get away with (although mine have sometimes been more frequent and a bit more random due to when big money has arrived and when I’ve really needed it!). Every time you pay a dividend you must hold a company meeting (with yourself and the company secretary) and note the amount you plan to pay in a minuted meeting that you then sign. In reality this is just a simple one page document that you modify every time you pay a dividend, then print and sign – easy!

Advantages To Having A Company

If you run a company it becomes an asset that other companies may consider buying that is separate from you as an individual. If you are self-employed, no one would ever “buy” you, they would probably just hire you (although they could buy some of your assets like a website or IP). Also if you do become an employee, like I am now, it’s very handy to still have a company ticking over in the background which is essentially nothing to do with you as an individual so that your employer can have no control over it. Some people even assign their companies over to their wives or trusted friends when they become employees of another company to avoid any “conflict of interest” issues.

It looks good on your resume if you owned and ran your own company, especially if it has been going for more than 5 years. Your accounts are publicly searchable too on Companies House. Plus you can re-purpose your company to handle other types of business once it’s set up if you get any bright ideas. Naturally you need to get a proper company bank account too, I forgot to mention that earlier. The banks will charge you for transactions made. I have a fairly low level of high value transactions and it costs me about £10 per month.

Anyway, I love having a company that is making money whilst I’m asleep and I love looking over my accounts and seeing how well I’m doing. I like that feeling of control and freedom even though it takes a certain amount of upkeep.

Well I spent way longer typing this than I planned, I hope that you find it useful!

This entry was posted on Sunday, February 1st, 2009 at 9:32 pm and is filed under Business. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.