Establishing a loan out company as a musician has the potential to become a very smart business investment. As a music artist, if you are making a living performing, a loan out company might offer you the opportunity to gain both personal liability protection and tax benefits. However, as will all legal solutions, there is no one size fits all. While starting a loan out company might be a great solution for some musicians, for others, it’s highly unnecessary and could actually come with some legal consequences.
What is a Loan Out Company?
A loan out company is a business entity that employs a musician with the goal of contracting out the musician's services. While this statement may appear confusing, understanding how the loan out company would work better explains exactly what a loan out company is.
How Loan Out Companies Work
The way a loan out company works, at least in terms of a music based loan out company, is in a way, very interconnected with the musician. Typically, a loan out company will enter into a contract with another company (or person) that wants to hire the services of the musician. For example, if I want to hire 50 Cent to perform at my birthday party, I would most likely enter into a contract with 50 Cent’s loan out company and not 50 Cent himself. 50 Cent’s loan out company would then, send 50 Cent over to perform at my birthday party and would then, pay 50 Cent a fee to do this. Thus, 50 Cent and his loan out company most likely also have a contract between them to deliver services for the company.
Why Should a Loan Out Company Be Used?
Based on the above example, you are likely thinking that you are simply adding an extra step that doesn’t need to be there. Why wouldn’t 50 Cent contract with me directly to perform at my birthday party instead of going to his loan out company? And while you would be correct in thinking that it may be easier for 50 Cent (or you as a musician) to contract directly, there are many reasons why taking this extra step might be well worth it.
By having a loan out company separate from the musician, the assets of the musician is separated from the company. The loan out company for musicians is traditionally either a limited liability company (LLC) or a corporation. With either an LLC or a corporation, personal liability protection is a benefit that both entities usually offer. While explaining personal liability protection can take up an entire blog post on its own, in the most simplest of terms, if your company gets sued, generally your personal assets can’t be used to satisfy the judgment against the company, and vice versa. For example, if your company has five thousand dollars in the company bank account, and you have eight thousand dollars in your personal bank account, if your company is sued for 10 thousand dollars and your company loses the lawsuit, if the five thousand dollars is the only assets the company has, they can’t come out after you for the remaining five thousand dollars the company still owes to the winner of the lawsuit.
A loan out company may see tax savings that would not be able to be received if the musician is providing services without one. Depending on how the business entity is structured, certain deductions may be available to the company that would not be available to the musician him/herself.
Problems in Using a Loan Out Company
There are many potential pitfalls that can result due to starting a loan out company. Knowing these pitfalls will help you either avoid them or decide a loan out company is not for you to begin with.
As with all businesses, if you do not structure your business properly or follow certain business/corporate formalities, your business could suffer in that your personal liability protection could be removed in the event of a lawsuit. Ensuring you speak to a business lawyer that has experience working with entertainment clients before deciding to start out a loan out company would greatly mitigate this risk. This business and entertainment lawyer would analyze your situation and decide which form of business is best for you and assist you with knowing which business/corporate formalities should be followed.
Depending on how your company is structured, you could risk the possibility of double taxation. If your company is structured to allow for double taxation, your company will be responsible for yearly taxes in addition to the taxes that will apply to you on the money received from the business as payment for performing services. Depending on which entity you choose and how it is organized for tax purposes, double taxation may be avoided. Speak to a business attorney to find out if you have the ability to avoid double taxation.
Overall, a loan out company could wind up being a great asset to a musician who is making a living in the music industry. Speaking to an experienced lawyer can help you evaluate whether forming a loan out company would be proper for your specific situation. Contact us at Cordero Law to learn more about loan out companies and to help you in determining whether you can benefit from forming one.
Julian Cordero is an Attorney, Music Producer, and Entrepreneur. Oh and he blogs too! Julian is licensed to practice law in New York and is the Managing Member of Cordero Law LLC, a New York City based law firm focusing on Business Law, Entertainment Law, and Intellectual Property