BY:Jake Levy, Daniel M. Wasser
A New York theatrical producer who seeks to raise money from investors to finance a production – generally referred to as a “syndication” – must decide whether to form a limited partnership or a limited liability company to serve as the production entity. Both are “pass-through” entities for tax purposes; i.e., income is not taxed at both the entity and the investor levels; rather losses, as well as income, are passed through directly to investors. Although S corporations also are “pass-through” entities, their utility as theatrical investment vehicles is limited due to restrictions on the number and nature of S corporation shareholders and also the requirement that there be only one class of shares.
In assessing the relative desirability of limited partnerships and limited liability companies, theatrical producers will have two primary concerns: protection from liability and cost. As discussed below, liability concerns can be addressed with either form of entity, although a limited liability company will in many situations accord the producer greater protection.
Regarding cost, through 2006, potentially significant differences in formation and maintenance costs made limited partnerships more attractive than limited liability companies for theatrical producers. The differences became less pronounced on January 1, 2007, when annual limited liability company filing fees were reduced, and further revisions to the New York Tax Law, effective for tax years beginning on or after January 1, 2008, further lowered the annual filing fee by altering the basis on which it is calculated. Consequently, the previously sizeable financial advantages of theatrical limited partnerships over theatrical limited liability companies have been significantly reduced.
In a limited partnership, there must be a general partner who has unlimited liability for the obligations of the partnership. An individual serving as general partner exposes his or her personal assets to the claims of creditors of the business and, for this reason, individuals rarely assume such a role. More commonly, the general partner is a business entity, which often is a newly formed entity with limited assets. Notwithstanding the exposure, many major theatrical producers do not form new entities to serve as general partners when they capitalize theatrical limited partnerships for two reasons: (i) their reputations are such that they could not hide behind a shell entity and remain in good standing within the theater community, and (ii) their management skill and experience help limit risk (e.g., they know when to close a foundering production).
For liability purposes, a limited liability company is identical to a corporation. This means that absent fraud or other extraordinary circumstances, creditors have recourse solely to the assets of the entity. Accordingly, the manager of a limited liability company (which is the equivalent of the general partner of a limited partnership in terms of control over operations) has no greater personal exposure to the claims of creditors than the president of a corporation. In this respect, a limited liability company is a greater shield against liability than a limited partnership – especially when compared with a limited partnership where a single purpose entity has not been formed to serve as the general partner.
New York´s official filing fees for the formation of theatrical limited partnerships and limited liability companies are about the same. In addition, New York has long imposed a requirement that newly formed limited liability companies and limited partnerships publicly announce their formation for a six week period in newspapers of general circulation. This infuriating requirement adds about $1,500 to the cost of forming a New York City-based limited partnership or limited liability company, serves no discernible purpose, generates no tax revenue, benefits only the New York Law Journal and other publications that carry the announcements, and solidifies New York´s reputation as an expensive place to do business. Many years ago (prior to the advent of limited liability companies), theatrical producers lobbied successfully for relief from the publication requirement. Astonishingly, this exemption from publication for theatrical limited partnerships was not extended to theatrical limited liability companies until several years after the New York Limited Liability Company Law was enacted in 1994. Until the exemption took effect, the publication requirement made theatrical limited liability companies more expensive than theatrical limited partnerships, but at this point formation costs are equal.
Maintenance costs – and specifically the annual filing fee – historically represented the largest difference between limited partnerships and limited liability companies. New York Tax Law imposes an annual filing fee on limited liability companies but not on limited partnerships. Until the most recent amendment to the New York Tax Law, that fee was $50 per member, with a minimum of $325 and a cap of $10,000 per year. Thus, for a theatrical limited liability company with more than a handful of members, the annual filing fee could become a significant financial burden, particularly after the production activities of that limited liability company ceased and it continued in existence merely to collect its share of subsidiary rights income. To illustrate, a theatrical limited liability company with 100 members might have easily absorbed the $5,000 annual filing fee while its Broadway production was running successfully; but when the Broadway production closed and rights reverted to the authors, the company´s annual income would be limited to its share of subsidiary rights income, the level of which might not have been sufficient to cover the $5,000 annual filing fee.
An amendment of the New York Tax Law, effective January 1, 2008, abolished the per member limited liability company annual filing fee and substituting for it an annual filing fee based upon New York source gross income. The fee ranges from $25, for New York source gross income of $100,000 or less, to $4,500, if New York source gross income is over $25,000,000, as follows:
|New York source income greater than:
|but not greater than:
|Annual filing fee:
New York source gross income is defined as the sum of the members´ shares of federal gross income from the limited liability company derived from or connected with New York sources, without any allowance or deduction for the cost of goods sold. Thus, for a theatrical production, New York source gross income would consist largely of the production´s net adjusted gross box office receipts (gross receipts adjusted for certain accepted deductions), plus the producer´s receipts from merchandise (and, if applicable, cast album) sales.
Applying the above hypothetical, a 100 member theatrical limited liability company that mounts a successful Broadway production would pay an annual filing fee (based on New York source gross income) of either $3,000 or $4,500, rather than $5,000 under the per member scheme. Most significantly, however, when the company´s annual income is limited to a share of the authors´ subsidiary rights income, the annual filing fee also will fall, most likely to $25, the statutory minimum.
It remains the case that no annual filing fee is required of a theatrical limited partnership. However, as discussed above, to limit liability exposure, the producer might elect to form a corporation or a limited liability company to serve as the general partner of a limited partnership. In such event, the formation and maintenance costs of that general partner, which are likely to include annual accounting charges of at least $1,000 for the preparation of a corporate tax return, must be added to the formation and maintenance costs of the limited partnership to fully evaluate the relative financial burden of a theatrical limited partnership versus a theatrical limited liability company.
Previously, a New York theatrical producer was able to achieve cost savings by utilizing a limited partnership rather than a limited liability company. However, the 2008 amendment to the New York Tax Law leveled the playing field, and now that cost is not a significant factor, theatrical producers will focus on liability protection. Even though liability protection can be achieved through either a limited partnership or a limited liability company, the need to have a general partner with unlimited liability is likely to cause theatrical producers to opt increasingly for limited liability companies.