Should my film company form an LLC? A new consideration for film companies.
Like the rest of the entertainment world, the film industry has significantly changed over the past years. Among one of these many changes, having formal business structure has become one of the norms that, many years ago, was unheard of. In today’s market, especially when attempting to secure investors, film companies are more likely to consider having a formal business entity for their individual film projects in order to protect and separate their assets.
Out of the many business entities to choose from, the limited liability company tends to be the common trend. However, is forming a limited liability company the way to go? Or is there an alternative?
What is a Limited Liability Company?
A limited liability company (commonly referred to as an LLC), in the United States, is considered a hybrid business structure. The reason an LLC is considered a hybrid structure is because an LLC can give you the best of both worlds – personal liability protection plus tax benefits.
While a corporation, as we will discuss later, gives its owners liability protection – meaning the personal assets of its owners will be considered separate from the assets of the business – with it, comes double taxation. A corporation is taxed on two levels, first on a business level, and then on a personal level from the dividends that its shareholders receive from the corporation.
On the contrary, a sole proprietorship or partnership both do not have the tax implications of a corporation. The profits and losses of these types of businesses pass through directly to the individual owner(s). However, a sole proprietorship or partnership does not have any liability protection. The debts and obligations of the business, become the debts and obligation of the owner(s).
An LLC allows you to receive the benefits of pass-through taxation (eliminating the problem of double taxation) and allow your personal assets to be separated from the assets of your business.
Is Forming a Limited Liability Company the Way to Go?
Maybe. While an LLC is a great option, for many companies, an LLC will not be your best option. As a general rule, when an LLC is a possible option for your business entity, a corporation should always be considered as well.
If your film company will work with investors, a corporation may be better equipped. A corporation generally better services the interests of the investors – thus making it more likely that an investor would feel comfortable investing in your company. While the corporation does not come with the similar tax benefits of an LLC, for some investors, this will have little to any value. This is especially true if the investor is looking for a long-term growth as opposed to a quick payout – where the double taxation will be more of an issue.
Do I need a lawyer to form my film company?
The short answer is no. However, the long answer is … you probably should. While it is possible to form a company without having to go to an attorney, there are many reasons that may outweigh the cost savings of not having an attorney create this entity for you.
When you hire an attorney to help you with forming a company, you are hiring someone for their legal knowledge and expertise. If you go about this process alone, or go to one of the many websites that will form a company for you, you are doing so without having proper legal guidance. While you are saving money in the short term, you could be costing yourself a lot more money in the long term by not forming the right company properly in the beginning.
While an LLC is an excellent option for many film companies, it is not your only option. In many cases, forming an LLC for your film company is not your best option. As mentioned above, for some film companies, a corporation would possibly make better sense to fit your company needs. Having an attorney help you flush out the different types of business entities and help you make a determination as to which one might be in your company’s best interest can be quite invaluable.
Julian Cordero is an Attorney, Business Strategist, and Music Producer. Oh and he blogs too! Julian is licensed to practice law in New York and is the Managing Attorney of Cordero Law LLC, a New York City based law firm focusing on Business Law, Entertainment Law, and Intellectual Property Law.