BY:STEVEN C. BEER, JAKE LEVY AND NEIL J. ROSINI
This Q&A was originally published in the Fall 2018 issue of Documentary magazine, a publication of the International Documentary Association, a nonprofit media arts organization based in Los Angeles.
Producers often form business entities to run all of their productions, rather than doing so as an individual person. Or, they might set up a single-purpose business entity for each production, or a combination of both. These entities employ individuals (often including the individual who founded the entity), and they develop, produce, finance and distribute the production as agents of the entity.
Most of these business entities are “S” corporations (to use tax nomenclature) or limited liability companies (“LLCs”), as opposed to partnerships or another corporate form. Limited liability companies and “S” corporations are both regarded as “pass-through” entities, which means the entity itself is not subject to income tax. Instead, the investors or owners are taxed individually after reconciling their shares of profits and losses on their personal tax returns. As a result, the investors or owners benefit from available tax deductions and pay taxes only at the individual level, rather than at both the corporate and individual levels.
Organizing a business entity also makes it easier to share ownership. Collaborators, financiers and other key players can acquire stock in an “S” corporation or become “members” of an LLC that owns the production. An LLC, however, offers more flexibility in several ways. For example, it allows greater flexibility in structuring financing, in contrast to “S” corporations, which are limited to a single class of stock. Also, LLCs allow other LLCs, corporations and partnerships to become members in addition to individuals, both foreign and domestic. Ownership of stock in “S” corporations is limited to individuals who are US taxpayers.
Another key benefit to establishing an “S” corporation or an LLC is personal liability reduction. If all transactions are done by the business entity, rather than by its owners, investors and employees in their personal capacities, and the business entity maintains distinct records and accounts, then generally only the business entity will be held accountable for damages, should there be a company default. (One exception to this rule, however, is when individuals are asked to sign personal guarantees of the business entity’s financial obligations, in which case they will assume that responsibility.) This legal shield, however, applies only to contractual obligations and not to criminal activity or torts, for which responsible individuals can almost always be held accountable separately from the business entity.
A “tort” is a liability that arises under law, rather than under contract. Examples include injuring someone, either intentionally or through negligence. Liability for copyright infringement, trademark infringement, violation of the rights of privacy and publicity, and defamation all fall in this category. Risk-reduction generally comes in the form of errors and omissions insurance, covering both the business entity and its officers, directors and employees, among others. This coverage doesn’t avoid liability but absorbs much of the cost of defending a lawsuit and, in the worst scenario, of being found liable and paying damages.