Answers from Mark Litwak, Attorney At Law
DISCLAIMER: The information provided here is intended to provide general information and does not constitute legal advice. You should not act or rely on such information without seeking the advice of an attorney and receiving counsel based on your particular facts and circumstances. Many of the legal principles mentioned might be subject to exceptions and qualifications, which are not necessarily noted in the answers. Furthermore, laws are subject to change and vary by jurisdiction.
Question: I am an Independent Producer based in Maryland who is in the process of incorporating. Please advise me on how to proceed. Is it true that it's better to incorporate in Delaware rather than Maryland or Washington, DC?
Answer: There may be little or no advantage to incorporating in Delaware if you are going to have an office in another state and pay taxes there as well. Delaware is desirable because it has liberal corporate governance rules, which probably won't matter for a small company controlled by you. You should consult an attorney or tax accountant to determine the tax advantages and liability issues in regards to incorporating, and whether another form of business entity, such as an LLC might be more advantageous.
Question: I'm a low budget ($20,000) filmmaker preparing to shoot a guerrilla style film in New York City. I'm setting up a corporation and can't seem to get a straight answer on what kind I should set up. Option A, a straight-ahead S-Corp. owned by my partner and I, with investment contracts signed between our company and our investors, or we set up an LLC. What are the advantages and disadvantages of each?
Answer: The most common business entities used by filmmakers are corporations (S or C type), limited liability companies (LLC), and limited partnerships (LP). The best vehicle to use depends on the circumstances, which vary. The major factors are taxes and limiting liability.
One reason to form a company is the desire to protect personal assets from potential liability. If a company that is a separate legal entity from the filmmaker produces a movie, then the filmmaker may not be liable for the debts and obligations of the company. However, for the filmmaker to avoid personal liability, he must sign all contracts in the name of the company and not give any personal guarantees.
The limited liability company (LLC) is a relatively new form of business entity, which combines some of the best aspects of partnership and corporate forms of business while avoiding some of the drawbacks of each. Members of an LLC have the same limited liability protection granted limited partners and corporate shareholders. Unlike a corporation, however, an LLC has more flexibility as to how to pay taxes, and can largely avoid the problem of double taxation.
If your investors are passive investors, you need to comply with the security laws. Whether you do this as a limited partnership, an LLC, or some other method, it doesn't much matter. Complying with the security laws is what is expensive. You do this as a limited offering under Reg. D of the federal and various state analogous statutes, you would be limited to 35 unaccredited investors, you cannot do any public solicitation. Whether your corporation signs contracts with investors, or whether the investors are members of an LLC, the security laws apply either way. For a $20,000 film, it's hard to justify the legal work necessary to comply with the law, therefore, I would suggest you might want to structure your deal in such a way that the security laws don't apply. By taking the money as a gift, or having the investors actively participate in producing the movie, you might be able to avoid these requirements.
Question: I am forming a small independent film production company. Like many others in this position, I don't have a great deal of start-up cash and find the cost of incorporation in California to be prohibitive. I've read about a company that can provide legal services for incorporation for something around $100; additionally, it recommends Delaware as an attractive state in which to form the corporation. What legal and practical disadvantages (and what advantages) are there for a company whose main business is feature film production, to incorporate in Delaware? Also, is incorporation by a company offering this service for this low fee likely to be legally sound?
Answer: You can incorporate yourself simply by paying the state filing fees and any other charges. However, if you don't know what you are doing you may set up the company incorrectly, and the consequences may prove costly later. While you are at it, you can also go to a medical supply house, buy a scalpel and perform your own surgery. The point is that in order to correctly set up a corporation, you need a certain amount of expertise to determine among other things whether a corporation is the best business vehicle for you to do business. Perhaps a partnership or limited liability company would be better for you in your circumstances. As for incorporating in Delaware, Delaware has lax rules as far as corporate governance goes, which is important to large public corporations, but that does not necessarily save you much money, because if you are incorporated in Delaware and doing business in California, you are going to be subject to California tax. You should probably incorporate in the state where you have your primary place of business.
Question: My friend and I have shot a no-budget film that has been financed out of our own pockets and through donations from family members. In hopes of the movie being picked up we are planning to form a partnership. Should we go general or limited and do we need to consult with an attorney for the specifics of such a setup.
Answer: With a general partnership, all the partners have control over the enterprise and no one has limited liability. If everyone is comfortable with sharing decision-making and no one requires limited liability, that's the way to go. On the other hand, if you have passive investors, people who are going to put money into the enterprise but not be involved in managing it, a limited partnership would be the appropriate vehicle to achieve those ends. A limited partnership, however, is considered a security, and it needs to comply with the security laws, which can be fairly expensive. In a limited partnership, the limited partners have limited control and limited liability while the general partners in the limited partnership run the enterprise and have unlimited liability.
Question: I'm an independent producer here in St. Louis, and I'm putting together a trailer and business plan for fundraising purposes. I'm still not sure how I should raise money for this film. I've always been told that a "limited partnership" is the way to go, but now I'm hearing about other options (Loan Agreement, Limited Liability, etc). Most of the funds will come from family and friends. Is an LP necessary? And if one is, is it possible I can draft the contracts on my own (without a lawyer doing it) and still have them be legally binding. There are no entertainment attorneys here in St. Louis, and I don't want to pay for something I can do myself. Any advice would be helpful.
Answer: If you are making an arrangement with passive investors, that is investors who put money into the project, expect to share in the profits, and don't have any control over the project, then both state and federal securities laws apply. There is no exemption in the security laws simply because your investors are friends or family. So, technically, if you take money from them and don't comply with securities laws, you are in violation of the law.
A limited partnership provides limited liability to the investors, which is often important to them, and limits their control over the endeavor, which is often something that the general partner, the filmmaker, wants. Yes, you can draft contracts on your own, but that is no guarantee you'll do it correctly. Securities laws are extremely complex, and I would not advise you to do this on your own. If you want to save money, perhaps you should do some of the production legal work on your own.
Question: We have a project and are interested in soliciting investors without violating SEC rules. What can we say that's legal but still gets the point across, and what is illegal?
Answer: The most important thing to say is that you are not making an offer. You are simply having a preliminary discussion with people. In order to take money from investors, you need to either register your company with the SEC, which costs a considerable sum, or fall into one of the limited offering exemptions. A major restriction on these limited offerings exemptions is that you cannot do any public solicitations like mass mailings and cold-callings. And you'll be limited to thirty-five unaccredited investors. An accredited investor is essentially a wealthy, sophisticated investor. Everyone else is an unaccredited investor. If you can live with those restrictions, the cost of complying with securities laws is considerably less but still significant. If you violate the securities laws, you can be subject to civil and criminal penalties.
Question: Putting together a business plan just makes good business sense. However, I gather that it is a legal requirement. Is there a form that the SEC or state requires? If so, does the state supply it or is it boilerplate bought at a stationary store.
Answer: If you are raising money from private investors who will not be actively involved in producing the movie, their interests are called securities and you will need to comply with the state and federal security laws. These laws are very complex, and there are civil and criminal penalties for their violation. This is one area of the law where you need to retain experienced counsel to prepare a limited offering memorandum, usually accompanied with a proposed LLC or Limited Partnership Agreement. Don't do it yourself unless you are the type of person who thinks it would be okay to do brain surgery on yourself.
Question: I want to shoot a low budget film. My question is, is it better to form a corporation or a limited liability partnership?
Answer: The question of what is the best vehicle depends on several factors, primarily liability and taxes. Today most independent filmmakers will either: (1) incorporate, (2) form a limited liability company, or (3) form a limited partnership with their investors being the limited partners. If you set up an entity that is considered a separate legal entity from yourself, this may insulate you from liability should someone be injured during the shoot or a lawsuit arise. Establishing a separate entity may have some tax consequences, however, which could be either positive or negative. Any source
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