If you work in the entertainment industry as a creative professional, it may be beneficial for you to form a “loan-out” company for liability and tax protection. Loan-out companies are entities which are owned by the talent; these companies then contract with third parties, such as film studios, and agree to provide the services of the owner. The talent is essentially hired by the loan-out company, who renders the services required by the company’s contract with the third party. Typically, the talent will form a Corporation or, more likely, an S Corporation. (The single member LLC is also becoming a popular vehicle for loan-out companies, depending on the state in which talent forms the business).
In other words, when MegaStudio contracts with its leading actor, the contract is between MegaStudio and ActorCorp. Actor will typically provide MegaStudio with an inducement letter in which the actor commits to provide their services to the studio and abide by the contract’s terms. The expenses which Actor incurs (lawyer’s fees, agent’s commissions, office/assistant expenses, travel expenses, wardrobe, publicity, etc.) are paid as business expenses through ActorCorp. The balance, after deducting payroll taxes, is then paid to the creative professional as salary, bonus or dividends, depending on the individual’s tax circumstances.
But when should you use a loan-out company?
If you’re a writer, actor or director, you should consider a loan-out company if your gross income from the creative services is between $75,000-$150,000 per year. However, this is only a general guideline. Depending on your personal financial situation, the corporate form may be beneficial for creative professionals who earn less, especially if you have assets you need to protect. If your gross earnings exceed $150,000 per year, a loan-out company should be considered a necessity.
In the music business, the need for a band to use a loan-out company has additional aspects which should be considered. Bands are unique, because unlike other creative professionals, there are two aspects to their business: (a) the creation/ownership/exploitation of the copyrights and (b) performance/merchandising rights. Unless you’re a solo act, your band is comprised of a couple of members, and you’ve probably got a handshake agreement where you’ve agreed to split everything you earn. This is fine if you’re a cover band playing the local saloon on Friday nights. However, most professional bands are operated through a corporation or LLC which contracts with the label and which contracts for their performances and their merchandising, with each member getting a pro rata share of the profits/losses.
Then, the band typically does one of two things. If all of the members are going to share in the publishing royalties from the song copyrights, the band will set up a separate entity to hold the copyrights. The publishing royalties are then split up through proportional shares of stock or membership interest in the loan-out company. Alternatively, each member sets up their own company, and each author’s fractional share is designated in the publishing contract with the company retained to administer the publishing rights.
In other bands, one or more (but less than all) of the members write the songs. Many of the great musical partnerships, like Lennon/McCartney, Page/Plant, Morrissey/Marr, managed their publishing in this manner. Depending on how your band agrees to split general band revenue and revenue from music publishing, all professional bands should have at least one business entity established and good documents prepared spelling out their agreement on how various revenue streams will be split.
Finally, what if you’re on the production side of the entertainment industry, i.e., producing a movie, a film, an album, or a play? In this instance, having your company organized as a corporation or an LLC is imperative. Have you ever seen a movie where there was only one producer listed in the credits? Me neither. Most producers have at least one, if not many, partners in the project. Even the smallest independent feature is likely to cost more than $100,000 to produce, and for every film which makes it to market, there are dozens where the project never makes a dime. As such, it’s important for the producers to protect themselves from liability to their investors and the myriad third parties they must contract with to get the project completed. Establishing a formal business entity which spell out the parties’ respective obligations and protect the individuals from personal liability is essential.