Those working in the entertainment industry will no doubt hear of the creation of loan-out companies. As the decision to create a loan-out company can have a big impact on both financial and legal aspects of an artist’s career, proper understanding and consideration is vital.
1
What is a loan out company?
A loan-out company is just a fancy name for fairly traditional organizations. To put it simply, loan-out companies are three things: personal service companies, traditional business entities, and employers of employees. A loan-out is a personal company, a legal business entity registered with the state in which it is established. They can take many different forms such as an LLC, an S-Corporation or a C-Corporation. Once it is formed, the loan-out company “loans” the services of the employee of the loan-out, e.g., an actor, director, writer, etc., by entering into contracts with the other party, such as producers or production companies.
2
How do loan-out companies work?
In a typical situation, an actor would form a loan-out corporation (we’ll say JoeSchmo, LLC for example). A production company hiring the actor would enter into a contract with JoeSchmo, LLC for the actor’s services, an employee of the loan-out, and in return, JoeSchmo, LLC would collect payment under the contract. The production company would make the check payable to JoeSchmo, LLC and because the actor was an employee of loan-out, it would be the responsibility of the loan-out company to pay applicable payroll taxes (rather than the production company). The loan-out corporation provides the artist's services, and certain other expenses like agency and manager commissions. Accounting fees, legal fees and related costs would be paid for and deducted at the corporate level. The remainder of the income paid to the loan-out company is typically paid to the artist as salary.
3
Why would someone want a loan-out company?
There are several advantages of having a loan out company. First, there is limitation of liability. Like any other corporation, loan-out companies are separate legal entities. Acts of the loan-out company that incur liability result in the corporation rather than the individual owner to that resulting liability. As a result, a loan-out company can act as a shield, protecting the employee’s personal assets from liabilities associated with the business. As with any corporation, the shield is not absolute, and won’t protect against such things such as fraud, misrepresentation and insolvency. There are also financial benefits to having a loan-out company. The loan-out can deduct business expenses such as office space and equipment. The loan-out can also set up a retirement accounts and other benefit programs for its employee.
4
How can someone create a loan-out company?
Loan-out companies are created like any other corporation. This entails filing information with the Secretary of State and paying the filing fees. During this stage several key decisions will need to be made such as the name of the corporation, the type of corporate form (S-Corp, C-Corp, LLC etc.). While it is possible to complete this using any one of the web-based legal self-help service providers on the market, an experienced attorney or accountant will provide better guidance on how best to make these decisions. A mistake at this point could cause many problems down the line.
5
Are there any disadvantages to having a loan-out company?
Creating a loan-out company isn’t right for every situation. There is a very real cost involved. In addition to the legal fees to set up the corporation and the filing fees paid to the state, in the of California, for example, there is an automatic annual fee of $800 which must be paid to the Franchise Tax Board regardless of the income earned by the corporation. There are also costs involved in filing taxes for the loan-out company. It is highly recommended that you get personal advice on whether it makes sense financially to form a loan-out company. A very broad rule of thumb however echoed by many accountants and other tax advisers suggest that if less than $75,000 annually is earned, formation of a loan-out company may not be not beneficial. Where income earned is between $75,000 and $100,000, it will most likely be beneficial, and where income earned is over $100,000, forming a loan-out company is virtually always beneficial.
6
Are there any other responsibilities with loan-out companies?
An additional responsibility of having a loan-out company is making sure to properly maintain the corporate existence. Depending on the type of corporation formed there may be corporate formalities that need to be maintained to ensure proper limitation of liability. Additional annual filings are also required by the state to ensure the active status of the corporation. As noted previously, a loan-out company will also require preparation of a separate tax return.
7
What are the considerations of proper setup and maintenance of a loan-out company?
It is of paramount importance to properly setup the loan-out company. It is better to take extra time to choose what entity to form and make sure the state filings are correct than to find out down the line that the way the loan-out company was setup won’t serve the intended purposes. Even if the loan-out is setup correctly, failing to maintain the corporate existence is another way to lose the benefits of the loan-out company and can also re-subject the artist to personal liability for the actions of the loan-out company. This is sometimes referred to as a “piercing of the corporate veil.”
8
Are there tax risks associated with loan-out companies?
The IRS has publicly opposed loan-out corporations because of the significant tax savings in regard to employee/independent contractor issues and other deductions and shelters that might not otherwise be available. However, where maintenance of good corporate minutes and existence of an employment agreement between the employee and loan-out corporation have been observed, loan-out companies have usually prevailed against IRS challenges. For this reason, consultation with a qualified attorney or tax professional is highly recommended. There is a possibility of a tax audit if not operated correctly.
9
How does proper Employer / Employee relationships affects loan-out companies?
Loan-out companies can fail if there is a failure to establish an Employer / Employee relationship between the company and the employee or a failure of loan-out company to properly contract for employee’s services. It is important that the loan-out company properly contracts with third parties for service of the employee.
10
Can you create a loan-out company by yourself?
It’s important to understand what you don’t get from legal self-help websites. First, these websites don’t offer legal advice or guidance on the tax implications of the choices that are made. As mentioned before, corporate maintenance is key to reaping the continued benefits of a loan-out company and legal self-help websites won’t provide the same level of service ensuring that proper corporate maintenance is properly sustained. Finally, complex legal issues do not exist in a vacuum. With legal self-help websites you do not have experienced help spotting other legal issues which you may be unaware of. For all these reasons, it is not recommended that you create and operate a loan-out company without consulting an attorney or tax professional.
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