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Company Law

D Michael Rose

Q: How do I organise a profit share company?

How do I go about setting up a professional theatre company? What are the legal considerations should I wish to run the organisation on a profit share basis?

A: I assume you are talking about a theatre production company. There are basically two kinds, namely those which are set up and registered as charities, and those which are set up with a view to commercial profit and personal gain.

A charitable company can make profits through a trading subsidiary provided that the trading subsidiary's profits are distributed only to the parent charity and applied for the latter's charitable purposes. If you wish to attract funding by grants or sponsorship from public bodies and other charitable institutions or by donations from the general public, you will need to register your company as a charity. A second company would have to be incorporated as a trading subsidiary of the first but in that event you should note that the directors will be regarded as trustees who, with very rare exceptions, are not allowed to receive any remuneration from the company, so if you want to be paid for your work you cannot be a director. If that is the route you wish to take then I would advise that the parent charity company is set up as a company limited by guarantee, which means that under its constitution, the members guarantee its liabilities up to a specified amount which can be as little as £1. The trading company should be set up as a conventional company, limited by shares and wholly owned by its parent charity. The constitution of both companies will need to be approved by the Charity Commissioners and you will need professional help to set them both up.

If you do not wish to go the charity route but to set up a commercial company for personal profit, then I would advise that whether or not professional help is needed depends on whether it is going to be a 'one man company', owned entirely by you, or whether you are going to have business partners involved. If it is going to be owned and run by you alone then you can buy a 'ready made shelf company', which has never traded, at a price of about £150 complete with a DIY pack explaining how to appoint directors, transfer and allot shares and so forth. However, such a company will very likely have an unusual name which you will probably not like and the Registrar of Companies will charge a fee of £20 for any permitted change.

If you have business partners then I would advise you to seek professional help to set up the company properly. This can be done either by forming a 'bespoke' company from scratch or by purchasing a ready made company and making the necessary changes required to structure the arrangements between you and your business partners within its constitution and/or by a separate shareholders' agreement as appropriate. Decisions will need to be made as to appointment of directors, company secretary and auditors (unless audit-exempt), allotment of shares, registered office (which need not be where the company carries on business), appointment of bankers and bank mandate, and most importantly the form of Memorandum and Articles of Association which is the company's constitution. This deals with such matters as voting rights and procedures for transfer of shares, pre-emptive transfer options, procedures for meetings of directors and shareholders and the passing of resolutions and matters of that kind. A ready-made shelf company will come with an existing constitution which may or may not need changing according to circumstances. There is a lot of form filling and, as I have said, except in the simplest of cases, it is desirable to seek professional help.

First published March 1996

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