Forming a Production Company
The first step in producing an independent movie is almost always the formation of a production company around the particular movie being made. Film production companies can be formed for the sole purpose of creating one movie, or with the intention of creating multiple films over a long period of time. Understanding the goals and motivations of all parties at the beginning of a business venture of any kind, but particularly filmmaking is essential in order to protect the financial, creative, and personal interests of everyone involved.
Often, what separates successful film productions from ones that never quite make it off the ground is the organizational structure of the company which produces it. Forming an independent production company has many benefits, such as giving the producers the freedom to make their own creative and financial choices outside the purview of a major studio. It also vitally protects the filmmakers from being held personally liable for possible financial losses which the film may accrue and creates a protective legal shell around the producers. Without a production company, the producer(s) can be held personally responsible for financial losses and sued for recovery.
THE BENEFITS OF ORGANIZING AN LLC
A Limited Liability Company (LLC) is by far the most common and most flexible structure for production enterprises, especially in the state of California. It is a hybrid business structure which combines the liability protection of a corporation with the tax benefits and flexibility associated with a partnership.
In an LLC, each owner is referred to as a “member,” and all profits and losses are passed through the business to the members who report them on their federal income taxes. The business itself is not taxed separately. The members can also directly manage the business’s affairs. The most important and desirable aspect of an LLC is the liability protection that it provides to its owners. Each owner is only liable for the amount which they have personally invested into the company and their personal assets may not be considered in the event of a lawsuit.
Other advantages of LLCs include the ability to share profits as the members see fit, significantly less record keeping and documentation than other corporate structures, and the ability to request S-corp status for tax purposes (an attorney can advise). Disadvantages to consider are the imposition of self-employment taxes to Medicare/Medicaid and Social Security and the short lifetime of an LLC; if one of the members decides to leave the company, the LLC must usually be dissolved.
In order to form an LLC, the members must file an Articles of Organization with the state, listing the business’s name, address, and information on the members of the business. In addition, it is advisable to draft and sign an Operating Agreement, a document delineating finances, rules, regulations, and management structure under which the LLC agrees to operate. State and local permits and licenses may be required to complete the process and begin full operation as an LLC.
OTHER STRUCTURES FOR PRODUCTION COMPANIES
Although an LLC has many benefits and is the best fit for the majority of small, new film production companies, other structures may work, depending on the producer(s)’ goals, plans, and financial situation. Each formation carries its own risks and advantages, which should be discussed with an entertainment lawyer before moving forward with any of the following.
A sole proprietorship is the simplest and most common structure for small businesses but is almost never recommended for a film production due to the high costs associated with producing movies. In a sole proprietorship, the business is unincorporated, and the owner is responsible for all costs, debts, losses, and liability. The owner can also claim all profits. They do not require formal action to begin; in fact, many people are sole proprietors without being aware of their status, such as freelance writers or designers. Although they are simple, they are highly risky and offer virtually no legal protection.
A partnership is largely similar to a sole proprietorship in that it offers no liability protection to the owners, but two or more individuals share ownership of the business. It is important, in this circumstance, to agree and legally document what contributions each partner will bring, how profits and financial burdens will be distributed, how conflicts will be resolved, and how ownership might be altered. Limited Partnerships are a variation of partnerships in which limited partners (who cannot participate in day-to-day management) have limited liability, but a general partner still holds personal financial responsibility for the company.
An S-corp is a particular kind of corporation (as opposed to a C-corp) that may work for certain film production enterprises. In order to become an S-corp, you must file Articles of Incorporation with the state in which you are incorporating, and pay appropriate fees. There are also often ongoing fees and taxes imposed by the state on S-corps. Advantages include avoiding double taxation (owners can report profits and losses on individual tax returns), investment opportunities through the sale of stock, and limited liability protection. However, it is important to remember that, if you form an LLC, you can choose to elect to have the LLC taxed as an S-corp by the IRS. Therefore, there are only certain cases in which the advantages of creating an S-corp instead of an LLC outweigh its financial and bureaucratic burdens.
LEGAL COUNSEL THROUGH FORMATION OF FILM COMPANY
Deciding which kind of business best suits your endeavors can be an overwhelming task if you are not equipped with all of the information. An attorney can discuss the pros and cons of each structure with you, and make sure that you consider all the production’s aspects as they relate to liability protection and tax benefits. A strong legal foundation for your film will avoid stalls later in the production process and can help maintain positive relationships between the producers, financiers, and, if applicable, stockholders. To speak with a lawyer working in entertainment law in Los Angeles today, call Corlandos Scott at (818) 707-5236 or contact him online.