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This article is used by permission of Mark Litwak, Esq. and is taken from
www.marklitwak.com.
ORGANIZING YOUR COMPANY
By Mark Litwak, Attorney at Law
Filmmakers frequently establish a company to produce and own their movie.
While there is no legal requirement to do so, there may be some benefit to
operating under the auspices of a company rather than making your film as
an individual or as a partner. For example, filmmakers and investors may
be willing to accept the complete loss of their film investment, but will
hesitate to risk losing their homes and other assets. By establishing a separate
business entity, investors can own the company that produces and owns the
film, without being personally liable for the actions of the company.
One of the most common business entities used by filmmakers is the limited
liability company (LLC). If a company that is a separate legal entity from
the filmmaker produces a movie, then the filmmaker may not be liable for
the debts and obligations of the company. However, for the filmmaker to avoid
personal liability, he must sign all contracts in the name of the company
and not give any personal guarantees.
The limited liability company (LLC) is a relatively new form of business
entity that combines some of the best aspects of partnership and corporate
forms of business while avoiding some of the drawbacks of each. Members of
an LLC have the same limited liability protection granted to limited partners
and corporate shareholders. Unlike a corporation, however, an LLC has more
flexibility as to how to pay taxes, and can largely avoid the problem of
double taxation.
An LLC has two classes of members: managing members and non-managing members.
Like general partners, the managing members run the business. Like limited
partners, the non-managing members are investors who do not operate the business.
Both managing and non-managing members have limited liability.
An LLC can elect to be treated like a partnership for federal income tax
purposes, and thereby avoid federal tax at the company level. LLC members
report their respective shares of LLC income or losses on their individual
tax returns. Although the LLC is not a tax-paying entity, the LLC must still
report its taxable income and file an informational return with the IRS.
The laws governing LLC’s vary by state. In California, LLC’s
are subject to state income tax, but the amount of tax is modest, and no
tax is assessed until there is total income of $250,000 or more per year.
However, like corporations and limited partnerships, LLC’s are subject
to an annual tax of $800 for the privilege of doing business in California.
An
LLC can be managed by one or more managers (a “manager-managed” LLC)
or by all the members (a “member-managed” LLC). A manager-managed
LLC is like a limited partnership with two classes of members: managers that
actively supervise the enterprise and non-managers who do not. Similarly,
a member-managed LLC is like a general partnership where all the partners
are involved in running the business.
In a manager-managed LLC, a manager need not be a member, but can be an
outsider hired to manage the enterprise. Managers are considered agents of
the LLC and they can bind the LLC to contracts with third parties. In a manager-managed
LLC, the non-managing members are not considered agents of the LLC.
The interest of a non-managing member is a security, and securities laws
apply. If all the members are active in the management of the LLC (i.e.,
all members are managers), there are no passive investors and the members’ interests
are not considered securities.
As with other business entities, if the LLC operates under a fictitious
business name, the company will need to file a DBA (Doing Business As). Since
the LLC is a separate legal entity, it will need to apply for an EIN (Federal
Employer Tax Identification Number), obtain any applicable state and local
business licenses, and file state and federal tax returns.
Which brings us to another reason to establish a company, to reduce taxes.
LLCs may be able to deduct certain expenses that would not be deductible,
or only be partially deductible, by a sole proprietor. Some fringe benefits
(e.g., medical insurance, pension plans) that a company provides employees
may be tax-deductible for the company rather than income to the employee.
Therefore, by setting up a company, paying yourself a salary, and giving
yourself generous fringe benefits, you may gain certain tax advantages. On
the other hand, the tax benefits may not outweigh the cost of forming the
company, which includes legal fees, filing fees, and the annual cost of preparing
and filing a company tax return. Moreover, some states assess a minimum annual
tax on companies even if they do not earn any income.
While establishing a company may protect you from liability for your company’s
breach of its contracts, it does not preclude other people from suing you
for your own negligence. So, for example, if you are negligent on a movie
set and cause injuries to others, you may be liable even if you are operating
under the auspices of a company.
When deciding what sort of business entity to form, it is always best to
consult with an attorney experienced in company formation in your state,
as well as a tax advisor.
Mark Litwak is a veteran entertainment attorney and producer’s rep
based in Beverly Hills, California. He is the author of six books, including
the recently published Risky Business, Financing and Distributing Independent
Film (Silman-James, 2004). He is the author of the CD-ROM program Movie Magic
Contracts, and the creator of the Entertainment Law Resources Web site: marklitwak.com.
He can be reached at law@marklitwak.com.
Disclaimer-Any
material sent to or provided by Mark Litwak is for illustrative and educational
purposes only and should not be relied upon as legal advice, or be considered
confidential or the basis of an attorney client relationship. This
material may not be suitable for your particular situation and different
legal advice may be appropriate depending on your jurisdiction or circumstances.
Therefore, you should not rely on this material, or any part of it, without
the advice of competent legal counsel.
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