Film Production: Business and Investment Structure

The first task of film production is to select and set up a business entity for the film. This is true whether the producer is making a short film, shooting wedding videos and commercials, or creating a larger feature film project involving hundreds of thousands of dollars, salaried employees, and a crew of independent contractors.

Business and Investment Structure

The first task of film production is to select and set up a business entity for the film. This is true whether the producer is making a short film, shooting wedding videos and commercials, or creating a larger feature film project involving hundreds of thousands of dollars, salaried employees, and a crew of independent contractors.

The goal of creating and using a business entity is to anticipate four primary areas: control, financing, liability and tax. Control refers to the manner in which the producer intends to manage and maintain control of the film project and involves such issues as “Who owns the film’s intellectual property?” and “Who has the right to manage the creative, financial and business aspects of the film project?” Financing refers to the source of funding for the film including interactions with investors, if the financing is equity-based. Liability refers to the obligations incurred by the film production and the producer’s personal liability for such obligations. Tax refers to the tax benefits (such as the Illinois Film Services Tax Credit and tax obligations incurred in the production and distribution of the film. Each of these issues should be considered as part of developing a film project.

The most common business entities are sole proprietorships, general partnerships, corporations and limited liability companies. The first two types ( sole proprietorships and general partnerships) should not be used in film production because they expose the producer to individual liability for the debts of the production. This is particularly true because independent film projects normally take at least 3 years (and often 5 or more years) to reach the production phase and it may take another 2 years to obtain a meaningful distribution deal (that is, a deal where money flows back to you). Keep in mind that film production is a very high risk endeavor and individual liability will expose you to the demands of creditors who want to be paid today. Thus, it is well worth the time and expense of forming a company and conducting all business in corporate form.

By organizing and operating as a corporation or a limited liability company, a producer can avoid personal liability for the business’s operations and can, more easily, bring investors into the project. Keep in mind that the protection offered by a corporation or LLC may disappear if you fail to comply with all the formalities. For example, if you fail to file annual reports with the Secretary of State your company will be dissolved, or if you mix personal and company funds, creditors may be able to reach your personal assets. So, create a separate bank account and FEIN for each entity.

To determine which entity is best for your project, you should speak with an accountant, attorney or someone familiar with the benefits and burdens of each type of entity. Setting up an Illinois corporation or LLC is a relatively simple process that involves filing certain forms with the Illinois Secretary of State which are available at the Secretary of State website. Be aware that creating and operating as an LLC is more complicated and expensive than creating and operating as a corporation. So, if you elect to operate as an LLC you must understand what other documents and agreements (such as an “operating agreement”) are required.

When beginning any business venture, a producer should consult with an accountant in order to understand and plan for tax issues. For example, Illinois has a tax credit incentive program for films shot in Illinois that expend funds for services and wages. But you must apply with the Illinois Film Office so take a look at the IFO’s website for complete details.

When developing a film project, many producers first create an incubator corporation or LLC (the “Development Company”) that develops one or more projects until the time when each project is ready to be funded and produced. The Development Company, which is controlled by the producer, does all the development work for the film project, such as acquiring the underlying literary work or screenplay on which the film is based. When the project is ready for funding and production, it is transferred to a separate LLC (the “Production LLC”), the common practice being to create a separate LLC for each film project, thus insulating the producer’s other projects from failure or liability. The Development Company often serves as the manager of the Production LLC thus creating a double level of protection for the individual producer.

The Production LLC will own or license all of the intellectual property associated with the film. This includes the rights to use the script, the rights to the actor’s performances, licenses for all music, and all other items that are discussed in the section on copyright. Potential distributors will carefully examine all of the Production LLC’s paperwork to make sure that the Production LLC holds all necessary intellectual property rights. Anyone working on the production should be hired by and paid by the Production LLC. The producer or the Development Company will typically be a “member” (that is, the owner) as well as the “manager” of the LLC.

Film is a collaborative process and it is common for two or more individuals to collaborate on the critical aspects of the film such as writing the screenplay, acquiring other intellectual property and retaining actors and crew. However, because producer “divorces” are also common, producers should negotiate and sign a Joint Venture, Collaboration or Joint Owner Agreement which provide who is entitled to make decisions with respect to the film project, who is responsible for certain activity, and what happens if one producer decides to leave the project. Many projects die because one of the producers has a different vision for the project and refuses to cooperate with the other producer. So remember that “good fences make good neighbors” and prepare a written agreement that sets out the expectations, responsibilities and rights of each producer.

The LCA wishes to thank Robert J.Labate (Holland & Knight), Daniel M. Pomerantz (Ungaretti & Harris) and Daliah Saper (Law Offices of Daliah Saper) for their essential contributions to these seminar materials
These seminars and materials were provided through the support of the Chicago Community Trust, Illinois Arts Council, and Sara Lee Foundation – Lead Corporate Sponsor.

© 2006 Lawyers for the Creative Arts. These materials are presented for informational purposes only and are not substitutes for professional advice based on a review of individual circumstances. Not all information provided herein applies to all situations and, in fact, may be detrimental to your project. Please consult a professional before undertaking any film project.

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