LEGALLY SPEAKING, IT DEPENDS: Loan Out Company

Christopher Schiller is a NY transactional entertainment attorney who counts many independent filmmakers and writers among his diverse client base. Follow Chris on Twitter @chrisschiller.

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They say no man is an island, but one man, or woman, can “be” a company. That's the essence of the concept behind a loan out company. Of course, as always, it's not that simple and as far as the details… it depends.

A boring but somewhat accurate definition of a loan out company could be

Of course, no one things of it this way. The working definition that applies to loan out company depends on who you are asking:

Studio – The company name to put on the lump sum checks instead of the writer, actor or other principal being hired to work in the movie.

Writer, actor or other principal – a piece of paper your business people told you to sign so that you could save a little money come tax time.

Tax agents and accountants – a properly formed and run (we hope) employer of an individual who pays that employee on a regular basis from the income the business accumulates over the year.

The law – a bundle of formalities that must be followed and obeyed in order to create and maintain a sufficient separation between an individual and the business entity that employs that individual as an intermediary service provider to the entertainment industry.

Each of these perspectives is valid, if narrow and all of them are a reflection of an oft used creation in Hollywood.

Why are they used? Well, let's look at the issues they are created to address.

It is mostly about tax issues. It's the same predicament whenever there is a lump sum windfall. Win the lottery and the IRS (insert your country's tax department) is right there to collect their due. Any large income payment pings their radar. But to be clear, a loan out company is NOT a tax evasion. You will still have to pay the same amount of taxes when all is said and done. What the loan out company allows is the ability to determine more on your own terms as to WHEN the tax due need be paid.

Set up properly and the loan out company turns the large, single payment into a series of much smaller and regularly spaced salary payments. Since these funds don't become income all at once, the company may be able to invest that money and earn a little interest prior to meting it out to the employee. In this way you might be able to make your final income a bit larger while still paying all the due taxes on it. But it has to be done just so or the tax man will get angry.

Setting up and running a loan out company can be done in many ways. Many different business entities could suffice and what those businesses are set up to do can vary. What matters is making sure you've got the right size and shape of the hoops you need to jump through.

Most loan out companies are corporations. They can be single shareholder, single purpose entities or closely held, multipurpose companies that do loan out as only part of their operations. Lots of other variations will work. It depends on the needs of the principal and how the company should be run to fill those desires.

The basic tenet is that the principal (insert actor, writer, director, etc. here) is not an employee of the studio doing the picture, but, an employee of the loan out company. This intermediary business entity takes the intended income from the source studio and holds it in the company coffers while paying a year long salary in intervals based on the amount of money taken in.

The loan out company assumes the risks of providing the proper employee for the actual work being done. In the studio contract it is likely that the person being hired is considered irreplaceable as stipulated in a key man (person) clause. This clause stipulates if the named individual is rendered unavailable the contract is voided. This is nearly always specified as the exact individual the company was created for. The loan out company will be held accountable in case something goes wrong (i.e. the actor flakes, the writer fails to deliver or the director is trapped in an avalanche for weeks during a shoot.)

This bit of distancing from responsibility is a normal course of forming a company as an intermediary in the first place. The special case with it being a service provided by usually the only individual that is able to perform that service doesn't change that.

Whatever approach is taken it is very important that the company be set up properly as a legitimate, legal entity. The law is a stickler for the required legal formalities for the particular business form chosen. Contrary to some general language interpretations of formalities, legal formalities are the required mandates of how a company is to act at certain times and situations. The requirements are mandatory (unless stated otherwise) and failure to comply fully with these formalities is a serious error. When required by the chosen business form, annual meetings, reporting schedules and details, handling of stock and other ownership issues are all part of the important niggling details to pay attention to and get right.

Failing to adhere to the legal requirements might lead to the forced dissolution of the company or devolve into a way to pierce the corporate veil, a term that means all the protections offered as a benefit of using a company to separate yourself from liabilities and risk are found to be a fallacy and any legal grudge holder can pursue right through the company to the owner personally for all he or she is worth.

There's also the issue of how the money flows through the company to the individual. It should be taken into account that the money could be first taxed at the corporate level and then taxed again as personal income once delivered in your salary. If the loan out company doesn't handle the money just right it could be costlier in payouts than any savings or gain that you are trying to garner from avoiding the lump sum problem in the first place.

Because of the rigorous and unforgiving complications that are involved in setting up and running a loan out company right why would anyone bother?

A loan out company isn't the best option for everyone. In fact, most people can go about their business without any issues without one. It is not a requirement when you reach a certain income level either. The decision point as to whether or not you need to form one and when are very individual and specific to the financial structure and desires of the persons involved.

Typically there is an income level you need to be above before the expenses in forming and maintaining a separate loan out company start to make sense. And how that money comes in the door is also a factor to consider. A screenwriter and TV writer who both make $150,000 annually for their toil have completely different perspectives. The TV writer can structure her contract so that the annual salary is paid in regular intervals directly from the showrunners thus obviating the need to form a separate loan out company to do the same thing. The feature writer is going to get all his money in a very short time period which makes the tax bite issue a bigger thing to deal with. Still, if the feature writer is a first time writer, there's no guarantee yet that the income stream will continue at a clip that will make the extra burden of creating a loan out company worth it. (I did say in the beginning that it depends, right?)

In the end it really is a personal choice as to whether the loan out company is something you should try at your current stage in your career. Seek the advice of your accountant, managers, colleagues and friends then make up your own mind. (One starting point, if you don't have an accountant yet, you probably don't need a loan out company either.) It ends up being a lot of work and worry to maintain one. You've got to be certain that the end results will be worth it for you.

For most of the practical side of the business it doesn't matter one way or the other whether you work through a loan out company or get paid directly. The details matter, but, as long as it is clear how you want to work it shouldn't be a stumbling block or looked upon as odd or unprofessional.

So to answer the question as to should you do it, it depends...

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