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July 6, 2010

Should Your Independent Film Incorporate Organize as an LLC?

Regardless of a film's credited production and/or distribution company, many movies are in fact their own LLC, created specifically for the purpose of giving rise to one finished film. Even if two different productions share many of the same personell, they would each be formed as their own LLC to ensure if something goes wrong on one project, the financing of the other would not be put at risk. FilmmakerIQ has just posted an excerpt from the book Independent Filmmaking, The Law & Business Guide for Financing, Shooting & Distributing Independent & Digital Films, which might come in handy if you're wondering whether you should incorporate for a film project:

If an individual filmmaker is not seeking investment financing, there may not be any benefit to forming a corporation, an LLC, or a limited partnership. Not only is the value of limited liability negligible, but most debt will come from personal loans or unsecured personal credit cards, and the financial risk associated with these obligations will not be changed by using a formal business structure. If the filmmaker is a guerrilla artist, or if she is shooting a short project with a small cast and crew, then she may be best advised to remain a sole proprietor. (See a very helpful comment from another lawyer below as to why this is wrong)

On the other hand, if the size of the project increases or if investors are brought in, it is very important that the filmmaker switch to a formal business entity. The worst choice is to ignore the problem and have the law treat the project as a general partnership. The decision to switch need not be made immediately. Tax laws allow the sole proprietor to exchange the business for the assets of a new entity without paying a tax penalty. But from the outset of the film project, the filmmaker should have the business management in mind, and she should work with a lawyer and accountant as early as possible so that the necessary business entity can be created when the filmmaker is ready.

In an effort to suss these issues out for myself, I recently attended an incorporation workshop, and as a result I'm working on my own longer article about incorporating -- not just for independent film, but for independent creatives of any kind. Figuring out whether to operate as a sole proprietor, LLC, or C/S-corp is nowhere near cut-and-dry, once you mix in accounting (i.e., tax) ramifications.

Link: Guide to Creating an LLC for Your Independent Film

Your Comment

12 Comments

Hey Ryan, great info, wish I had that link a few weeks ago...

I had been debating whether or not to incorporate for a while, but I recently did some freelance work for a major corp that required me to. I went with an LLC since it's just about the same tax-wise as being a sole proprietor, assuming you're a single-member company. The main difference is that you have to file taxes quarterly to qualify for NYC film production tax breaks. It's definitely worth it for that reason alone.

I'm only a few weeks into this process and still trying to wrap my head around all this info, but it would be good to pool our knowledge and avoid any expensive pitfalls. Looking forward to your longer article.

Paul

July 6, 2010

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Paul

Sweet. Looking forward to the next article.

July 6, 2010

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Ryan-

Thanks for raising the issue. I normally don't reply to these posts but I felt that given the broad misconceptions in the public mind regarding terminology, business structures, tax consequences and legal liabilities, your readers might benefit form some clarifications.

First, with respect to terminology, one "incorporates" a corporation, "organizes" and LLC and "forms" a limited liability partnership. Each such fictitious legal entity has its own rules, requirements and associated terminology. Conversely, Sole proprietorships and partnerships are not necessarily "formed." They are de facto legal structures, although one can govern a partnership relationship by use of a Partnership Agreement.

Second, with respect to which business structure is best suited to one's particular needs, this is best decided by having a discussion with a knowledgable business attorney. Each structure has benefits and drawbacks, and there are nuances to these structures that vary by jurisdiction (State) due to variances in the State statures that govern their existence.

Third, with respect to tax consequences, although limited partnerships, corporations and LLCs may receive the same tax treatment, this is not guaranteed simply by selection of an entity. Tax treatment of the entity and its owners is also subject to various nuances and formal requirements.

Lastly, the first excerpted paragraph in your post is flat out WRONG. Whether one chooses to encapsulate one's business in a legal entity limiting the liability of its owners is rarely, if ever, driven solely by the decision whether to secure investment capital from outside sources. Simply put, a corporation, LLC or limited partnership shields the owners assets from the legal and financial liability of a business or commercial venture. For a filmmaker or other creative professional, there is always the risk, however remote, of intellectual property liability. Regardless of whether a project is a commercial success, without a business entity in place, the "owner" of the project is personally liable for the debts of the business, financial or otherwise.

I hope your readers find the forgoing useful and STRONGLY suggest that they consult with qualified legal counsel rather than basing these types of decisions on blog posts. Most reputable firms, especially those that cater to creatives, will (or should) offer a no fee consultation on these issues.

July 9, 2010

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David -- thanks very much for the clarifications -- I know better than to say forming an LLC is an act of incorporation -- it's in my notes several times from the workshop I recently attended that an LLC is "organized," .

"Simply put, a corporation, LLC or limited partnership shields the owners assets from the legal and financial liability of a business or commercial venture."

That was absolutely my impression as well, but I figured I'd defer to a more qualified source -- thanks again for the correction.

July 9, 2010

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Ryan Koo
Founder
Writer/Director

Hey Ryan,

Just wanted to add my two cents from (costly) experience. If you're trying to form a legal entity in NY, I HIGHLY recommend considering organizing in another state, or forming an s corp instead. In order to become a legal LLC in NY, you must comply with an arcane and expensive law that requires you to publish an announcement citing your organization in two publications over a series of weeks. This will cost upwards of $1500 and there's no real getting around it, not if you want to be legit anyway. Both LLCs and S-Corps grant personal protection from debts and liabilities of business and in both cases, profits and loss pass through the company and are reported on the individuals tax return--whether a managing member in the case of an LLC or a shareholder in the case of an s-corp. There are other differences, but the legal advice I got was that for a smallish independent production company created for a single project, it really didn't matter that much which way you went--as long as you chose one.

July 9, 2010

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Hey Julia,

The problem with S-corps is their structure is so rigid that it rarely makes sense for people in our position to incorporate that way, in my opinion (though there can be financial benefits to being an S-corp that you don't get as an LLC). The ridiculous announcement requirement in NYC is another issue -- I have it on good authority that you can get away with skipping this step, keeping in mind that you WILL eventually have to do it IF you ever get in any trouble (e.g., you're taken to court -- at THAT point you will have to be in good standing with regards to your announcement, but you could do it then). I've been told if you DON'T pay for the announcements you will still be in good standing regarding your liability protection, etc. But then again I am not a lawyer and only know what I'm told.

July 10, 2010

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Ryan Koo
Founder
Writer/Director

Hey Ryan,

I didn't see any significant differences between S Corps and LLCs that would affect a filmmakers ability to operate as long as you have sub-100 members (and they are all US citizens, which I guess could be a drawback). Its easy to get a shareholder certificate and the articles don't take that long to draft in either case.

Regarding LLCs in NYC--That's what I had originally been told too, but the law changed about 3 years ago and you no longer will be recognized as in good standing with the state of NY without compliance:

"Under the new laws, however, the failure to satisfy the publication requirement within the time allotted will result in suspension of the domestic Limited Liability Entity's authority to carry on, conduct or transact business in the State of New York."

http://www.metrocorpcounsel.com/current.php?artType=view&artMonth=June&a...

July 11, 2010

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Hmm, that link didn't seem to contain any info on NY and the publication requirement. I'll take your word for it -- it's making me re-think my article, as anything I write (even if it's been cleared with one lawyer) will probably be wrong in the eyes of another...

In terms of what happens if a partnership dissolves, who is the first to get paid in the case of profitability, etc etc I think S-corps are more rigid, no?

July 11, 2010

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Ryan Koo
Founder
Writer/Director

Hey Ryan,

Really enjoy reading your articles every week... Just curious if you happen to know if I have to organize an LLC or similar entiry if I'm raising funds on kickstarter for a short film? Can't seem to find this info on the web..

Thanks so much!

Emilie

October 13, 2011

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You don't have to by any means, but there are a number of questions about taxes that arise so I'd recommend consulting with an accountant.

October 13, 2011

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Ryan Koo
Founder
Writer/Director

Hi -- I own a foreign Limited Company and a US LLC, both in filmmaking and creative services.

I would *never* undertake any kind of filmmaking project without limited liability protection. Regardless of where the production funds originate, there are 101 other things that could wrong in the course of a film/creative project and culminate in a lawsuit. Without limited liability protection, it is you, and your buck, getting sued, not the corporation/LLC.

Note that, even if you operate as a corporation/LLC, if you are very negligent, a court may decide it is appropriate to "pierce the veil" and assert that you yourself are liable for whatever it is. But this is rare and you have to have pretty much no integrity.

Whoever wrote the first paragraph (since struck out) should not be anywhere near a business advice microphone.

Best

Z

July 18, 2013

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Z

Oh no! I kinda hoped NY would have changed that ridiculous law by now! It put me off incorporating in that state.

Ryan, in your piece, you might like to touch on the advantages of incorporating in Delaware (or Nevada), regardless of state of operation. :)

July 18, 2013

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Z