Film Production Legalities Part II: Business Entity Formation

This segment will cover the various business entities that are available in Louisiana and how well suited (or unsuited) they are to film production.  Choosing the right entity for your film depends on the interplay of four different factors: control, liability, financing, and tax.  Generally, your goal will be to maximize your control over business decisions and minimize your liability and taxation for your chosen method of financing. 

Each of these entities can exist by themselves, or they can exist in layers.  You can create your own, single member LLC, partner with another individual or another LLC.  You can use your personal LLC as an umbrella under which you create individual film project entities.  Essentially, you can usually structure your production company creatively to maintain control and manage liability.  Keep in mind, though, that the law does not usually look favorably on shell companies and may “pierce the veil” (disregard liability protection) where warranted. 

 

Sole Proprietorship, General Partnership 

Sole proprietorships and general partnerships are the default business entities for individuals or groups, respectively.  They don’t require you to file any paperwork with the secretary of state, so you could potentially create a partnership with another person unintentionally.  Neither one of these are well suited to film production, though.  While they both offer maximum control over the business, they offer no liability protection; if you get sued, your personal assets are at stake. 

 

Commendam Partnership

A commendam partnership (called a limited partnership in other states) consists of at least one general partner and one commendam (limited) partner.  The general partner(s) have full managerial powers and rights but are also subject to full liability, as in a general partnership.  The commendam partners cannot manage the partnership and are only liable to the extent of their contribution to the partnership.  Alone, this is not much better than a general partnership in terms of limiting your liability but it does preserve your control while allowing investment partners.  You can still limit your personal liability by using your parent production company as the general partner, though.  This entity type is not generally going to be the best entity, by itself, for film production, but may be useful in some circumstances where you have interested investors who do not want to be active in the production.

 

Registered Limited Liability Partnership

This is the first entity that protects partners from liability.  Partners in an LLP are not personally liable for the actions of other partners.  However, an LLP will not protect partnership assets, personal assets from the partner’s share of partnership debts, or personal assets from liability for personal actions done on behalf of the partnership.  You may attract investors more easily with an LLP as opposed to an LLC (described below) due to the segregated nature of LLP liability.  This comes at the possible expense of loss of control, though.  An LLP could work well where all of the partners are actively involved in the production.

 

Limited Liability Company

This is almost the “default” type of organization for film production in Louisiana and with good reason.  An LLC is composed of equity owners called members.  The LLC shields the members from personal liability like a corporation but allows the members to control the company like a partnership.  The LLC is also one of the more flexible business entities for its level of liability protection. 

LLCs may be member managed or manager managed.  Member managed is the standard; each member gets a vote in the operation of the business, just like a partnership.  However, if you are looking for passive investors, you should think about manager management.  Managers are elected from the members and manage the business.  Members in a manager managed LLC are not allowed to manage.  This way you can ensure that you and any other active investor will have control over the production.

LLCs are easy to create: the articles of organization can be as simple as a one or two page fill-in-the-blank form.  However, this doesn’t tell anyone in the company how the company should be run.  I said that LLCs were flexible, and I meant it; you have to create an operating agreement that details how the production company is run.

 

Tax Break!

You may be wondering why I said that taxes were an important consideration and then went completely silent on the matter.  That’s because the primary issue is whether or not the entity is subject to “double taxation” or whether it enjoys “pass through” taxation.  Most of the entities discussed above this section have pass through taxation and those below may be double taxed.

Pass through taxation is where each equity owner pays tax on their share of the business profits on their personal returns.  This is the default type of taxation for most business entities.  Sole proprietorships, partnerships, most LLCs, and S corporations enjoy pass through taxation. 

Double taxation refers to a situation where the business entity itself pays taxes on profits and equity owners pay tax on any dividends they receive.  This really applies to only C corporations and those few LLCs that elect to get taxed as C corporations.

Double taxation is not necessarily as bad as it sounds, and for some business ventures may actually be a preferable method of taxation because equity owners do not have to pay Medicare or Social Security taxes from their dividends.  Film production companies do not generally exist for a significant length of time though, so these benefits are not as important as they are to other business ventures.

 

Corporation

A corporation protects its shareholders from personal liability for corporate actions and control is divided among the shareholders, board members, and officers.  For a small corporation, which is likely for most films, there will be considerable overlap among shareholders, board members, and officers.  Corporations are well situated legally when there are many investors, which is not very common for independent films right now, but may become more important if equity crowdfunding is ever formalized.  The main problem you will face with a corporate structure is the rigidity.  This is one of the least flexible entities and comes with a bevy of structural and reporting requirements.  A corporate structure can be great for certain kinds of businesses but right now it would not be my first recommendation for a film project.

 

Next topic: Pre-Production