Asked and Answered: Should I have a Loan Out Company?

“Asked and Answered” will be a new occasional feature of this blog.  From time to time, I'll answer some of the most frequently asked questions I receive in my practice.

This is intended as general information only and  does not establish an attorney-client relationship.  It is not a substitute for a private, independent consultation with an attorney selected to advise you after a full investigation of the facts and law relevant to your matter.  We will not be responsible for readers' detrimental reliance upon the information appearing in this feature.

Q: I have recently heard about becoming your own corporation.  What does this mean for a screenwriter?   Would you be able to explain some of the law behind it?

A: Yes, many performers, writers and other professionals in entertainment form their own corporations or Limited Liability Companies (LLCs) to act as a so-called “loan-out” company.

The loan-out company becomes the employer of the artist, and then enters into contracts with producers, production companies, etc., on behalf of the artist, essentially “lending” the artist's services for individual projects.

There are several reasons for forming a loan-out company.

1. Limitation of Liability. A corporation (or LLC) is a separate “person” in the eyes of the law. Therefore, when the corporation acts or fails to act in such a way that incurs liability, the corporation, and not the individual owner will be liabile. This allows the owner to shield his or her personal assets from liabilities associated with the business. (as a writer, you are in business for yourself). So, by forming a loan-out company, your personal home, retirement accounts, and other assets won't be as exposed, should a project result in a claim or lawsuit.

2. Financial Benefits: Because the studio or production company is paying the corporation, rather than an individual, it’s easier to deduct business expenses, such as office space, assistants and computers. The Studio also need not withhold taxes from the payments to a loan-out. Instead, the loan-out company is responsible for its own taxes and for handling the payroll to you, the owner.
The loan-out can set up a pension plan, medical reimbursement, and other benefit programs for its sole employee.

The down-side of forming a loan out company is its cost, and the technical formalities required to maintain the company. Costs vary from state-to-state, but between filing fees and taxes, forming and maintaining a loan-out company can cost a few hundred to around one thousand dollars per year.

Depending on the amount of income the artist earns, these costs may be off-set by savings at the personal income tax level. As a general rule-of-thumb, once you're earning more than about $150,000 you should consider forming a loan-out company. It's important, however, to discuss the question of whether to form a loan-out with your accountant AND your lawyer, to be sure you're making the right move.