To LLC or Not to LLC? Not really a question.

Do I really need to form a separate LLC for each film I make?

Every independent filmmaker who consults me about starting a new privately financed project asks me whether it’s really necessary to form an LLC for the Picture, or whether she can do it under her existing production company.   My reply is nearly always,  “Yes.  It's necessary.  Each film should be its own LLC,  or at least some kind of entity.”

WHAT IS AN LLC?

Before I explain the need for the entity, let’s just be clear about the meaning of the term “LLC”. LLC stands for Limited Liability Company. LLCs are a relatively modern entity type. Prior to the 1980s many equity-financed business ventures used a multi-layered approach involving a corporation acting as the general partner of a Limited Partnership insulating investors from liability. This became unwieldy and in response, many States adopted LLCs. At first, most jurisdictions required LLCs to have multiple members, but many (including California, where many films are made), an LLC can have as few as one member.

There are a few reasons for forming an LLC, and in the case of most independent film projects, all apply

FINANCING VEHICLE

First, the existence of the LLC allows the filmmakers to sell equity interests in the company to raise the financing for the film. In other words, each investor can purchase a percentage ownership of the LLC, and be entitled to a share of the film’s profits.

By separating each film into its own entity, investors share only in those films to the budgets of which they’ve contributed, and thus participate only in the profits from such films. By contrast, if a single entity controls multiple films, the investors in that entity share in the profits from all of those films. (this is similar to ‘cross-collateralization’). Similarly, in such a scenario, a money-losing film can drag the profits of the entire company down, even where other films have made money.

So, by creating an LLC for each film, the project stands on its own as a business, and investors share only in the profits and losses from that film/business.

LIMITED LIABILITY

Second, like a corporation’s shareholders, members (investors) and managers of an LLC enjoy limited liability. This means that should the film incur liability, the greatest loss the investors might suffer is the amount they initially invested in the company. The creditor is not, barring extraordinary circumstances, able to reach through the LLC to the individual members or managers to settle the liability or debt.

In the absence of an LLC or other limited liability entity, investors might be viewed as partners, and be held jointly and severally liable for any and all debts of the ‘partnership’. Even more troubling, the ‘partnership’ could be deemed to extend to multiple films, or even other ventures in which the filmmaker is involved.
Why LLC?

LLCs are generally easier to operate than corporations or limited partnerships. There are fewer ‘formalities’ associated with running an LLC, and the company’s operations are typically controlled by a manager or managers, whose tenure is not, except in extreme cases, subject to termination by the members. LLCs are governed primarily by an “Operating Agreement”, which can, within the bounds of the law, establish whatever mechanisms for governance the members may agree upon.

CONCLUSION

So, on balance, the limitation on liability for those investing in the project, simple financing mechanism, and ease of operation make the LLC the entity of choice for filmmakers financing their projects privately, whether through equity investors, or using their own money.

Consult an Attorney

Of course, every situation is different, and the material in this articles should not be viewed as a substitute for custom-tailored legal advice. If you’re considering a film project of any size, a consultation with an experienced entertainment lawyer is critical.  Fortunately, forming an LLC is not a very expensive proposition.  In the scheme of motion picture budgets, it's the cheapest insurance you can get.