We previously published an article which looked at the VAT complexities for businesses that use online influencers for marketing purposes. We now turn our attention to influencers themselves and how their transition into modern-day entrepreneurs/business owners requires careful planning and key early decision-making.
Influencers and content creators continue to evolve from promoting other brands through their social media channels, to creating their own brand and productising this by developing a range of goods and services, which are then sold largely through e-commerce channels. Their impact on the economy when they have successfully created a business for themselves has been compared to that of more traditional entrepreneurs.
Turning your social media account into a business
Recent history provides several examples of successful influencers who have become entrepreneurs with thriving businesses on the back of their online following. The likes of Mrs Hinch grew their account and profile from practically nil, to over 4 million followers in a few years, leveraging their strong social media presence to propel their entrepreneurial careers.
Many more influencers (aka modern-day entrepreneurs) have been able to develop and monetise their brands through the opportunity presented to them via the Covid-19 pandemic, and none more so than Joe Wicks, who is a prime example of someone who managed to successfully combine online fame alongside an entrepreneurial spirit to become a hugely successful business owner. In the case of Mr Wicks, he is now considered to be one of the UK’s leading fitness influencers, with a business which includes an array of different income streams.
However, simply having millions of followers or TikTok views doesn’t guarantee a successful business venture – implementing the right structures and a well-executed business plan is vital for any aspiring entrepreneur and one of the most important steps on any path to success is knowing how to structure your business.
Sole trader or limited company?
One of the first questions is whether or not the business will be operated through a limited company, or if it will remain a sole trader?
Whilst operating as a sub-contracted online marketing channel for brands, it would typically be the case that the influencer simply operates as a sole trader and provides marketing services in this capacity. Around 56% of the businesses in the UK are sole traders, while small and medium-sized enterprises (SMEs) account for 99% of all UK businesses, and of the 5.5 million businesses which make up this amount, 1.4 million do not have any employees.
Operating as a sole trader would certainly suit influencers starting out in their careers, as the environment can be a challenging one early on, recognising that it requires in excess of 121 million TikTok video views to generate the average UK yearly salary (£33,000). However, for influencers whose annual income begins to approach the higher rate bands of income tax (a rate of 40% applies from £50,271 currently), careful thought and consideration should be given to establishing a company.
When taking the next step of creating a business that has its own brand and extended operations, running this through a limited company (either public or private) will have certain benefits, including: easier access to investors, legal protection, the ability for greater succession planning and tax efficiencies to name a few. However, this will need to be considered alongside the additional costs associated with such a move. For example, the cost of compliance for a company is greater than a sole trader as statutory reporting requirements are more extensive following incorporation. This isn’t only applicable to larger businesses, as the regulatory bodies are looking to increase financial reporting transparency for businesses of all sizes.
Annual financial statements prepared in a specific format, and annual confirmation statements need to be lodged with Companies House (who are also moving towards more transparent reporting). Additionally, there is a need for corporation tax returns to be filed with HM Revenue & Customs (HMRC), as opposed to the single personal tax return required to be submitted by an individual. Changes to the company such as director or shareholder changes also need to be notified and business records maintained to a required standard.
What about corporation tax?
The rate of tax a company pays on its profits is generally less than personal tax rates for sole traders in the higher earnings category, and this is an appealing factor in establishing a company. In April 2023, there were changes to corporation tax rates, and depending on the level of profit, rates have increased to 25% for certain businesses. We have examined these changes, the impact on cashflow and how to successfully manage this process in another article.
Another consideration for the business owner is how to be paid by the business, whether that is through salary, a dividend or a combination of the two. Personal tax will be payable with respect to that remuneration.
Attracting investors and access to finance
Incorporating a company will provide more credibility to the business and help further enhance the reputation of a growing brand. This will open doors and provide access to business loans, something which may be the preferred way of raising capital for many influencers.
The alternative is to seek private investment by offering an equity share in the company, and whilst raising funds this way would not result in interest charges having to be paid, it would mean a shared ownership of the business, and potentially a reduced amount for the owner to be able to extract in the way of dividends. Some investors may want more than a passive role, offering their business expertise to help the company develop and grow to the benefit of the influencer, but also to ensure a return on their investment.
Hiring employees for the first time
An influencer operating a one-person business, with contractors, agency workers or third-party advisors being utilised to support the many facets of a developing company, will at some point consider employing staff directly. This is a step which should not be underestimated, and immediate considerations include:
- Agreeing salaries and being mindful of National Minimum Wage requirements;
- Determining the legal right of the individual to work in the UK;
- Registering and administering payroll and paying tax and National Insurance;
- Drafting a contract of employment; and
- Enrolling a workplace pension scheme.
Liability risk for an influencer/sole trader
Another important consideration is risk and liability. Sole traders will incorporate a company to protect themselves and limit the amount of personal risk through the separation that is created between the business and the influencer upon incorporation. Sole traders tend to turn to professional indemnity or public liability insurance to protect themselves and their assets however such insurance can be expensive, and it could be more cost effective to put business assets into a company and shelter personal assets. Of course, these challenges and obligations are not unique to influencers and would apply to any aspiring entrepreneur during the early days of their journey.
The role of advisers and specialists in guiding and supporting influencers is a critical one, and we work with many entrepreneurs and new business owners, providing a full spectrum of accounting, tax and business advisory services for those operating through both a company and as sole traders. We can also refer you to a network of other intermediaries who provide services and advice in other critical areas required to run a successful business.
To find out how we can help you and your business, please speak to Nick Hart, VAT Director or with your usual Saffery contact.
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