00:00:03:01 - 00:00:31:02
Dori Zavala JD
Welcome to Open for Show Business, a podcast for indie filmmakers where we talk about the business of show business. I'm your host Dori Zavala, an entertainment attorney and producer. Each episode we'll talk about interesting news in the entertainment world and do a deep dive on a topic related to the business of filmmaking. Now let's fade in. Hello, filmmakers, and welcome to the first episode of the Open for Show Business podcast.
00:00:31:05 - 00:00:57:15
Dori Zavala JD
I'm Dori Zavala. I'm an entertainment attorney, and I wanted to spend these first few episodes going through some of the most frequently asked questions that I get from filmmakers about the legal and business side of filmmaking. Today, we're going to be talking about setting up a film company for your film project. And we're not talking about a production company that is for multiple projects.
00:00:57:16 - 00:01:19:28
Dori Zavala JD
We're talking about setting up a company for each individual film project. And I found that this is a concept that a lot of filmmakers have trouble understanding the reasons why it's needed and how to do it and the structure to pick. But today we're going to be talking about that, why you even need to set up an individual film company for each individual film project.
00:01:20:11 - 00:01:50:15
Dori Zavala JD
And then we're going to talk about the different structures that you can consider and use, and the pros and cons of each of those structures. Sound good? Okay, well, let's get started. First, we're going to talk about why it's important for you to set up an individual film company for each film project. Some of the reasons are protecting your personal assets, managing risks for yourself and your partners and the project, attracting investors and fundraising.
00:01:50:17 - 00:02:12:00
Dori Zavala JD
Now, before we get into that, I do want to talk a little bit about the difference between a film company that you set up for an individual film project and a production company that serves as an umbrella over multiple projects. A lot of what we're talking about today as far as corporate structures, which could be an LLC, an S Corp, a C Corp.
00:02:12:14 - 00:02:40:11
Dori Zavala JD
Those are all structures or companies, but those are all individual companies. And your production company should be set up as an individual company. That individual company could hold different companies underneath it. So let's say, for example, your production company is an LLC, a limited liability company. You have that LLC as the owner or holder of multiple individual LLC, each of which are for each film.
00:02:41:05 - 00:03:06:06
Dori Zavala JD
Let me break this down a little bit more. To give you an example. Let's say that your production company is called XYZ Production Company. It's an LLC. You run it as a separate company and then you have three films that are in the work. You have Film A, Film B, Film C. So Film A would be an individual company, perhaps an LLC that's called let's call it Film A LLC.
00:03:06:25 - 00:03:37:22
Dori Zavala JD
And then you have a separate one called Film B LLC, and you have your third one is Film C LLC. They're all individual LLCs, all individual companies, and they are all owned by your production company, XYZ Production Company, LLC. You have multiple LLCs in this scenario and they're all individual companies. One is for the production company, which serves as an umbrella, and your individual LLC is your individual film projects each have their own LLC.
00:03:38:03 - 00:04:02:17
Dori Zavala JD
Hopefully that makes sense to give you a little bit of context of what we're talking about today, which is why you even need these separate individual companies or LLCs in the first place and how it works for each individual film project. A lot of times filmmakers will focus so much on the creative part, which is the fun part, you know, creating the vision, getting your message into the world.
00:04:02:24 - 00:04:26:21
Dori Zavala JD
It's very easy to ignore the nuts and bolts, but these are things that really matter because you could lose all of it, you know, not to be a Debbie Downer. There really is so much that hinges on the legal and business aspects of protecting yourself, protecting your partners, protecting your crew, protecting your cast, protecting your script, protecting your project.
00:04:26:28 - 00:04:49:21
Dori Zavala JD
These are all things that you have to consider. And it's sort of a necessary evil if you don't really like the legal business and admin side. But they're important to make sure that your project that you pour your heart and soul into is actually going to be sellable, distributable. It will attract investors and it will protect you. Okay.
00:04:50:08 - 00:05:15:05
Dori Zavala JD
The first thing I want to talk about, I think that's the most important reason why and the most important thing for you to understand is the concept of limited liability under the law. Limited liability is whenever you take steps from a legal or business standpoint to like it says limit your liability. And it might be easy to just say, well, it's okay if I don't have limited liability.
00:05:15:12 - 00:05:38:28
Dori Zavala JD
You know, perhaps this is just a very low budget film that I'm creating. And, you know, there's not a lot of chance of anything going wrong. So I'm okay with not having that limited liability. But you really do want to take steps to limit it, especially when those steps are not super complicated or super expensive or super time consuming.
00:05:39:10 - 00:06:03:10
Dori Zavala JD
It's worth it to do it just to make sure that you're safe. So when I talk about limited liability, what I'm talking about in part is protecting your personal assets. Do you, as a filmmaker, have assets in your name? You have a house, you have a car, probably multiple cars. You may have film equipment, computer equipment. Anything that you own basically are considered to be your personal assets.
00:06:03:10 - 00:06:25:19
Dori Zavala JD
Once you start a film project or open a business or create anything that involves other people, you're opening yourself up to personal liability. What that means is that if somebody were to sue you, they could go after all of your personal assets, they could go after your house, they could go after your cars, and they could go after your computer equipment.
00:06:25:19 - 00:06:53:07
Dori Zavala JD
Basically, anything that you own personally, they could go after that in a lawsuit to the solution to this is to take all of your personal assets and put them into a box. And that box is going to contain everything that you own personally, and it's going to keep it separate and it's going to keep it protected from anything else you do as far as other projects or businesses, the films, all of that is going to be separate.
00:06:53:18 - 00:07:21:11
Dori Zavala JD
If something were to happen with your film or with your production company or with your business, anybody who sues that business will only be able to go after the assets of that business. They will not be able to go after your personal assets that are inside your personal box to the concept of limited liability protection is basically creating a box black box can be different structures, it can be an LLC, it could be an S Corp, it could be a C Corp.
00:07:21:21 - 00:07:47:26
Dori Zavala JD
But the concept is that you have this box and you're keeping all of the assets separate in in that box. So in this scenario, basically, instead of using the box for your personal assets, you're using the box for your business assets, and each business will have its own box of assets. In this scenario, each film project is to be treated as a separate business and each one will have its own asset.
00:07:48:14 - 00:08:11:07
Dori Zavala JD
Why would we want to do that? Why would we want a separate box for each film instead of just putting all of it into one box? If somebody sues for anything in that box, they can go after the entire contents of the box, let's say, and film a you have a script, you've produced it, you're in the distribution stage.
00:08:11:07 - 00:08:28:02
Dori Zavala JD
When something comes up, there is a dispute with one of the investors and they decide to sue you. If you have film A, film B and film C all in the same box, then when they sue you, they can go after all of your assets. So they could go after your finished film B They could go after your script for film.
00:08:28:02 - 00:08:48:05
Dori Zavala JD
See, all of it would be together and all of it would be fair game. So basically any liability from one of the boxes or from one of the films will extend to all of your films. So it's not just about personal liability, it's also about protecting any of the assets that you have and trying to separate them or divide them up as much as possible.
00:08:48:15 - 00:09:15:14
Dori Zavala JD
Hopefully that makes sense as to why we need an individual box for each film project. Our production company again can be its own box that usually will have the production companies bank account where income will come into distributions will be made from there, and it will be the umbrella company that's holding the individual film projects. But each individual film project will have its own box.
00:09:15:15 - 00:09:42:09
Dori Zavala JD
This doesn't just protect you. This also protects your partners, your investors, anybody else who's involved with the project. It also limits their liability. So if somebody sues on that project, they can only go after the assets in that project. They cannot go after the personal assets of anybody who's involved. Now, there are some exceptions. It's very important to keep all of your accounting separate, and I'll talk about that in another episode.
00:09:42:09 - 00:10:12:14
Dori Zavala JD
There are some ways they could go after your personal assets if you're not keeping everything separate. But for the most part, that's the concept, is keeping everything in a separate box for liability purposes and risk management. Now, another reason that you'll want to set up a separate company for each individual film project is attracting investors. Setting up an LLC makes film projects more attractive to investors because it reduces their risk exposure.
00:10:12:28 - 00:10:35:17
Dori Zavala JD
Most investors, especially those at higher levels that are not just family or friends, they want to reduce their risk exposure. The best way to reduce their risk exposure is by setting up the company as an LLC. It limits their liability. If they're a passive investor, they're not liable for any debt of the LLC and it greatly reduces their risk.
00:10:35:17 - 00:10:59:10
Dori Zavala JD
So most investors will expect to see that they're more likely to fund a project that has a clear legal structure that limits their personal liability. There's already enough risk involved with investing in film without having to also worry about having a legal structure set up that is going to put them personally on the line for any of the liability of the film project.
00:10:59:23 - 00:11:29:05
Dori Zavala JD
Another reason to do this is for fundraising. And when I say fundraising, this could be through donations like charitable donations, or this can also be different types of crowdfunding, whether it be donation crowdfunding or equity crowdfunding. There are government requirements and regulations and sometimes even required by the sites that allow for crowdfunding that you have. A separate company could be an LLC, it can be taxed as an S corp.
00:11:29:05 - 00:11:48:02
Dori Zavala JD
There's again, there's a lot of different structures for this, but they will want you to have a separate company also in order to later pay your crew and open a separate bank account, you're usually going to need an Employer Identification Number or an EIN. You need to take that out in the name of a business. It could be a sole proprietorship,
00:11:48:02 - 00:12:11:03
Dori Zavala JD
but again, for all of the reasons we just went through, that is not recommended, which leads nicely into the different types of structures. LLC is the most popular for filmmakers and there's a lot of reasons for that. But there are some other business structures that you may have heard discussed, but one of them is sole proprietorship and usually in every state.
00:12:11:03 - 00:12:32:04
Dori Zavala JD
I do have to say this every state is different on how you set up corporations and sole proprietorships, but usually a sole proprietorship is just the default. If you have a business and you've never set up a structure for it, then you have a sole proprietorship. One of the downsides of a sole proprietorship is that you have unlimited personal liability.
00:12:32:20 - 00:12:54:03
Dori Zavala JD
So again, they can go after your personal assets. There's nothing that's putting your business into a box that's going to keep it separate from everything else that you own. That's one of the big, big downsides of a sole proprietorship, but it also just doesn't convey the professionalism that having an LLC set up will do, it doesn't have the ease of fundraising.
00:12:54:21 - 00:13:23:14
Dori Zavala JD
It's just not really - it's sort of a default. The sole proprietorship is sort of a default and not really something that I would consider to be a corporate structure that works for a film project. But an LLC is popular and it's the one I recommend. It's usually pretty easy to set up. You set up an LLC at the state level and every state is a little bit different on how you file for that LLC, but it's usually pretty straightforward.
00:13:23:18 - 00:13:48:28
Dori Zavala JD
You can usually do it online. It's usually minimal costs to set it up in Arizona. I know the cost is $60. That changes everywhere, but it's not too hard to set up. You set it up online and it gives you that liability protection and it also gives you a lot of tax benefits and there's a lot of operational flexibility that comes with an LLC.
00:13:48:28 - 00:14:13:18
Dori Zavala JD
So I usually recommend for my clients that we set up the LLC. And as far as taxes go, there's some different ways that an LLC can be taxed. And that's one of the things I like about the LLC is that there's a lot of flexibility with how you want to operate the LLC. You could set up an LLC and then later on you could elect to be taxed as an S Corp, or you could elect to be taxed as a C Corp.
00:14:13:18 - 00:14:39:05
Dori Zavala JD
And there's a lot of intricacies in the way that you're taxed. But an LLC will be taxed usually as something that's called pass through taxation. And pass through taxation is where the company's profit and losses will pass through to the owner's personal tax returns. And this is again getting into complicated tax issues, but it avoids double taxation, which is something that comes a lot from being taxed as a corporation.
00:14:39:15 - 00:14:59:18
Dori Zavala JD
These are things that you would want to talk to with your accountant. But for most filmmakers, the easiest road is to just set up the LLC from the beginning, do it on a state level so that you have that separate entity. You can apply for the employer identification number, you can set up your individual business bank account, and all of that goes through the LLC.
00:14:59:26 - 00:15:24:29
Dori Zavala JD
You have a structure, you look professional to investors, you're able to participate in fundraising and you get all of that liability protection as well as operational simplicity. So what I mean by that is that there's usually not a lot of annual filing requirements, if any, from the states, but there's not a lot of voting or paperwork requirements like corporations have.
00:15:24:29 - 00:15:52:09
Dori Zavala JD
Corporations taxes can be very complex just to file them, just to create and file the returns. And there are usually a lot of requirements as far as annual reports and minutes and things like that. LLCs are usually just the simplest way to go and they're a great way to start out with a film project providing that liability protection and ease of setup, as well as the tax benefits and the operational simplicity.
00:15:52:09 - 00:16:18:15
Dori Zavala JD
Now once you have your LLC set up, it's also important to have a customized Operating Agreement. Your operating agreement will outline your management structure, your profit distribution, your decision making processes, if there's any voting, if it's managed by a manager or by a member. These are all things that would be included in your operating agreement, especially if you're going to be taking any investment, any outside investment.
00:16:18:26 - 00:16:38:18
Dori Zavala JD
You'll want to make sure that you have a very clear operating agreement. And if you have partners, this also applies because this is basically establishing how this LLC is going to be run. Like I mentioned, there's a lot of flexibility, but you need to set it out in writing how it's going to be run. Everyone's on the same page and they know what's going to happen.
00:16:38:26 - 00:17:17:03
Dori Zavala JD
Finally, setting up your film, your individual film project as an LLC will enhance the credibility of your company. You'll appear more professional and organized to investors, to distributors, to collaborators that LLC can hold all of your chain of title documents, your copyright, your script. It would hold basically everything related to your film project in it. It helps to create a brand identity for you, and it creates a formal structure under which all of the creative aspects of your film project can be produced and marketed for that specific film.
00:17:17:08 - 00:17:48:11
Dori Zavala JD
Okay, so that was a lot to digest. I hope that that all made sense and that you now have a clear idea of why it's important to form an LLC for your film project and why I recommend that all indie filmmakers form an LLC for their production company as well as for each individual film. To recap, the reasons for this include limited liability protection, tax flexibility, ease of management, enhanced professional credibility, credibility with investors.
00:17:48:11 - 00:18:16:16
Dori Zavala JD
It's really important to establish this solid legal foundation for all of your film projects. This needs to be done very early on in the process, towards the very beginning, even as you're going into the development stage, this LLC needs to be set up. Anything that you have that's in your name, such as the script needs to be transferred into the box of the LLC so that you can manage it and you can protect it that way and you can protect your personal assets that way.
00:18:17:06 - 00:18:40:05
Dori Zavala JD
So I would encourage all filmmakers that are listening to seek legal and financial advice to properly set up and manage your LLC, make sure that you're complying with all of the state requirements and all of the accounting requirements and consult with professionals for personalized guidance and support unique to your project. Thank you so much for tuning in today.
00:18:40:13 - 00:19:08:27
Dori Zavala JD
If you have any questions, feel free to reach out with those at [email protected]. I do respond to all of the emails and anything that you send in could form the basis of something for a future podcast episode. I'm making this for you guys, so I would really love to know what questions you have so that I can dive deeper into those if you are able to subscribe to the podcast wherever you listen, that would be great and stay tuned for future episodes.
00:19:08:27 - 00:19:21:29
Dori Zavala JD
Thank you so much and have a great day. Thanks for listening. If you enjoyed the podcast, please consider leaving a review as it helps others find us. Until next time .... fade out.
