FIND ANSWERS: A QUESTION ABOUT LOAN OUT COMPANIES
What is a loan-out company, and how does it work?
A loan-out is a personal company that is a legal business entity registered with the state in which it is established. There are many different forms this company can take – from an LLC (limited liability company) to an S-Corporation. An accountant with experience in the entertainment industry can best determine the type of company structure most suitable for your circumstances. Once it is formed, the loan-out company can enter into contracts with producers, production companies, etc. to “loan” the services of the artist, such as an actor, writer or director, that it employs. For example, if I form a corporation (let’s call it KellyCo, Incorporated), KellyCo Inc. can invoice my script’s buyer for services performed by me, the writer, who would be considered an employee of KellyCo. In other words, the production company purchasing the script would make the check payable to KellyCo my loan-out company, not to me directly. Since I am an employee of KellyCo, it is the responsibility of my loan-out company to pay applicable payroll taxes rather than the production company.
As a writer, should I form a loan-out company when selling my script?
Having a loan-out is not a requirement for selling your script or signing a contract, so why go through this hassle?
- Limitation of liability: A corporation is
a separate entity legally. Because of this, when a corporation acts or fails to act in a way that incurs liability, the corporation rather than the individual owner will generally be liable. As a result, a corporation can allow the owner to shield, to some degree, his or her personal assets from liabilities associated with the business. However, there are exceptions to these limitations on personal assets in the cases of fraud, misrepresentation and insolvency.
- Financial benefits: The loan-out can deduct business expenses such as office space and equipment. The loan-out can also set up a pension plan and other benefit programs for its employee.
In short, it’s all about accounting advantages and legal protection. Consult with an attorney regarding your individual legal needs. Ask your personal accountant if it is in your favor to be paid through a corporation versus directly. A corporation in the state of California, for example, automatically pays an annual fee of $800 to the Franchise Tax Board no matter how much income it has, and there are costs involved in forming the corporation and filing its taxes. Your accountant can weigh the pros and cons of these costs versus the savings that you might have on your personal income taxes. If your payment is sizeable enough, a loan-out may be worthwhile, but it’s certainly not required and doesn’t have anything to do with how professional you come across as a writer.