Why Form A Production Company?

For many filmmakers, the first step in the production process is to create a business entity. There are several reasons to do this. The most obvious, of course, is to be able to raise money. But there are other reasons.

Types of Entities

The types of business entities that are most commonly used for film productions are: corporation, limited liability company (LLC), or limited partnership (LP). All of these allow the owners to limit their liability to the amount they have invested in the company.

Each of these types of entities has their advantages and disadvantages and it’s best to discuss your needs with an entertainment attorney before you form the entity. If you would like an in-depth general discussion, I discuss each of these entities and their pluses and minuses in the DVD series, What Every Filmmaker Needs to Know About the Law.

Advantages of an Entity

By setting up an entity you can divide the financial risk among several people. That is, you are able to have investors in your production or otherwise share responsibilities.

Your company can enter into contracts, hold rights, and bring lawsuits. It also allows you to avoid personal lawsuits so that your assets are protected. While this may not seem an issue for many young filmmakers who have no assets, it will become an issue when your film is successful.

You can separate your personal finances from the company’s finances, which has many accounting and tax advantages.

If something happens to you, the company lives on and can be run by your partners or successors with very little disruption. Similarly, you can sell and transfer your interests in the company.

Avoiding Liability

Anytime you have a film production you expose yourself to liability. Whether it’s the claim of an author that you’ve stolen his or her work, a vehicle accident a crew member has while running an errand for you, or a designer who uses someone else’s work in his or her design, something will go wrong in every production.

Under the legal principle of respondeat superior, an employer is responsible for the actions of its employees. It is preferable that the employer be a business entity rather than an individual so you can avoid personal liability.

Partnerships

Whether you intend it or not, when two or more people decide to do a film production together, they have formed a partnership. That is, until they form one of the business entities mentioned above.

There are downsides and upsides to a partnership depending on your perspective. Each partner is personally responsible for the debts and obligations of each of the other partners (even if you don’t know about them), so if your partner does something wrong, you could end up in trouble.

Each partner has a fiduciary duty to his other partners, which is a way of saying you can’t act against your partners’ interests and must be loyal to your partners.

Unless you have a written agreement that says otherwise, the partnership owns all property acquired through the partnership. All partners share equally in the income and losses of the partnership regardless of the amount of work they actually do in the business.

So, be aware of this before you call up your friend and say, “let’s make a movie together.”

DBAs

Some filmmakers create a fictitious business name, often referred to as a “DBA,” under the erroneous belief that it gives them some protection. It does not.

A fictitious business name is merely a marketing device for sole proprietorships and partnerships that allows them to do business under a name other than their own, while notifying the public of the actual person responsible for any debts. DBAs are often chosen to describe the business and make it more memorable in advertising.

A fictitious business name (DBA) does not in any way reduce the liability of the owner or owners of that company.

For More Information

In the video on Setting Up Your Company, volume 1 of the What Every Filmmaker Needs to Know About the Law series, I discuss business entities in great detail, presented in a way that non-lawyers can easily understand. If you don’t already own the set (which is available at a discount to my readers), go to the What Every Filmmaker Needs to Know About the Law website to purchase it today.

If you’d like my help with your production or your agreements, click the “Production Counsel Website” link above.

© Keith E. Cooper. All rights reserved. You may freely link to this post, but please do not copy (in whole or in part) without permission of the copyright owner.

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