[NEohioPAL] Limited Liability Companies for Films - Installment #1

Mon Sep 19 17:53:45 PDT 2011

I. Basics of LLCs

         Independent filmmakers are busy people and often wear many hats.
The producer of an independent film is often the person organizing the
numerous tasks and people doing them to put a film together. To make sure he
is not the one holding the bag for everything at the end of the production,
the filmmaker needs a business organization that spells out who does what,
who is responsible for paying for things, how those people are to work
together, and under what circumstances they are to break up. The creative
rush of working on a film sometimes has the effect of putting the business
organization on the back burner, but this can have dire consequences. Like
any group of people forming to do business, a film should have a formal
business form, or the principals will be liable for all the debts of the
project personally. If there is no business form registered, the
participants will be treated and taxed as a partnership, with each partner
liable for his or her divided share of the debts. A single person making a
film will be treated and taxed as a sole proprietor, and will report film
income and debts as his own, on his personal income tax form. The
organization form which is the easiest and most suited for a film production
involving a group of people is the Limited Liability Company, or LLC
governed in Ohio by Ohio Revised Code Chapter
1705.[1]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Filmmaking.docx#_ftn1>

         An LLC can consist of a single owner or many members; it can be
managed by the members themselves, or by an outside managing company that is
not part of the LLC. This is all spelled out in the LLC’s operating
agreement, the part of the Articles of
Organization[2]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Filmmaking.docx#_ftn2>which
sets out not only the people who will be members of the LLC and what
their role will be, but the contributions they will make to the company. It
is essential to detail every aspect of the company and how it will be run in
the operating agreement. This will help to avoid the necessity of the
disagreeing members hashing out what they meant in a court setting, which
can be very expensive. There are several helpful checklists in Blackford
Business Organizations on Limited Liability Companies which will make sure
the owner(s) do all that is required by law in the formation of the company.
It sets out mandatory provisions of the Articles of Organization, such as
the name of the company; its purpose; its duration, unless it is to be
perpetual; its address, and statutory
agent.[3]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Filmmaking.docx#_ftn3>A
film LLC may be formed for the production of a single film, and thus
may
have a limited duration with more detailed provisions in the event of the
termination of the company. An LLC formed by a group of members to produce a
number of films may have a perpetual duration and have more detailed rules
for allocating profits and losses from the operation. One caveat for the
formation of multiple LLCs for individual movies is that the companies must
remain separate, with separate offices, bank accounts, recordkeeping, and
expenditures. Any commingling of funds between multiple LLCs with the same
or similar members may result in the voiding of the business form as a
`sham’ or `shell’ company, which may allow creditors to go after the assets
of the solvent LLC or even the alter ego of the company, the principal
members. It may be tempting to share funds between solvent and insolvent
films if one movie produced by the same group of people makes money and
another does not, but in exchange for limiting the liability of the
principals for debts of the company, strict recordkeeping and separate books
are required to use the LLC form. If the company is sued for a personal
injury or contract breach, the principals may end up being liable to the
injured party if there is no real evidence that the LLC form has been
complied with. To avoid being sued, the members or principals of an LLC
comprising the film production itself should make sure all contracts with
the participants, vendors, licensors and members are solid, clear, and not
capable of being interpreted more than one way. Address all issues – make
sure there are provisions for enforcement, recordkeeping and auditing. The
contract elements of offer, acceptance, and consideration (some value or
benefit given) should be clear in your releases for performers and crew. All
the intellectual property used in your film (sounds and images) should be
licensed or permission obtained for their use from the copyright or
trademark holders. Copyright clearinghouses and music licensing companies
and websites can be utilized to help with the clearances. This allows the
filmmaker to obtain distribution and errors and omissions insurance as well.
[4]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Filmmaking.docx#_ftn4>
Also, possible tax liens and penalties could accrue if the LLC does not pay
employment or other taxes incurred by the company’s activities. If there are
employees paid salaries or wages, the filmmaker must deduct employment
taxes, social security and disability insurance from their pay. The Screen
Actors Guild contracts require such deductions, as well as payments to
the  SAG-Producers
Pension and Health
Plans.[5]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Filmmaking.docx#_ftn5>
 Another checklist gives provisions that could be included in the Operating
Agreement, but are not mandatory, such as management form; rights to
transfer membership interests, allocation of profits, losses, gain and
credits; voting requirements; dispute resolution procedures; specification
of events that will cause dissolution of the
company;[6]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Filmmaking.docx#_ftn6>adoption
of compliance, sexual harassment, non-discrimination and other
policies, and a code of ethics; setting up of bank accounts; compensation
plans; and what is to be done when a member dies or becomes
incompetent.[7]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Filmmaking.docx#_ftn7>

         Records of the stated contributions are required to be kept by the
company[8]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Filmmaking.docx#_ftn8>and
are usually provided in an attachment to the Operating Agreement. Each
member’s contribution may be either in cash, property, services rendered, a
promissory note, or any other binding obligation to contribute cash or
property or to perform services; by providing any other benefit to the
limited liability company; or by any combination of
these.[9]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Filmmaking.docx#_ftn9>A
promise by a member to contribute to the limited liability company is
not
enforceable unless it is in writing signed by the
member.[10]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Filmmaking.docx#_ftn10>After
promising to contribute to the LLC, the member is liable for that
contribution even if the member is unable to perform the promise because of
death, disability, or other reason. If the member is unable to contribute
the promised property or services, the LLC has the option of compelling the
member to contribute the cash value equal to the portion of the stated value
of the contribution the member has failed to
make.[11]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Filmmaking.docx#_ftn11>Provisions
about the contributions of members can include buy and sell
arrangements and self-dealing rules for the members; establishment of a
capital account for each member, and the method of accounting to be used to
determine additions or subtractions from the capital account; and
determination of the fair market value by members or managers if property
other than cash is
received.[12]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Filmmaking.docx#_ftn12>The
LLC also has other rights under Ohio law against the member who has
failed to contribute what he promised to the LLC. However, by the consent of
all the members, the failure of a member to make a promised contribution or
to return money or other property paid or distributed in violation of the
LLC laws may be compromised, unless otherwise stated in the operating
agreement.[13]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Filmmaking.docx#_ftn13>Filmmakers
are creative people, who gather together with other friends and
artists to make a movie, but things can get decidedly unfriendly if the
duties and responsibilities of each participant are not spelled out.
Filmmaking can be an expensive proposition, and even a small independent
film can easily cost upwards of $100,000. The least amount of production
expenditures spent in Ohio that will qualify the producers for the Ohio Film
Tax Credit consideration is
$300,000.[14]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Filmmaking.docx#_ftn14>Rather
than subjecting your house or other property to a lien for a film
debt, a filmmaker should take the time to comply with the statutory and
practical requirements of the Limited Liability Company form. It will be
well worth it in the long run in making sure that debts or even the
splitting of profits do not become an unnecessary concern.

 Mary Ellen Tomazic is an attorney in Cleveland specializing in
entertainment
issue such as copyright, trademarks, contracts and licenses for musical
groups and filmmakers.

------------------------------

[1]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Filmmaking.docx#_ftnref1>Ohio
Revised Code 1705.01 – 1705.61 , Lawriter Ohio Laws and Rules,
codes.ohio.gov/orc/17

[2]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Filmmaking.docx#_ftnref2>O.R.C.
1705.04.

[3]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Filmmaking.docx#_ftnref3>
Jason
C. Blackford, Baldwin’s Ohio Practice, Blackford Business Organizations 1,
Ch. 14 (West 2009).

[4]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Filmmaking.docx#_ftnref4>See
Tomazic, Legally Obtaining Rights to Music for Your Film, Parts I &
III
(2011) *available at *www.reelgrok.com, www.reeltvnetwork.com) or from the
Author.

[5]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Filmmaking.docx#_ftnref5>Screen
Actors Guild Basic Agreement 34, 34 (2005).

[6]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Filmmaking.docx#_ftnref6>O.R.C.
1705.43(
A)(2).

[7]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Filmmaking.docx#_ftnref7>Blackford,
*supra* note 6.

[8]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Filmmaking.docx#_ftnref8>O.R.C.
1705.28.

[9]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Filmmaking.docx#_ftnref9>O.R.C.
1705.09(A).

[10]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Filmmaking.docx#_ftnref10>O.R.C.
1705.09(B).

[11]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Filmmaking.docx#_ftnref11>O.R.C.
1705.09(C).

[12]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Filmmaking.docx#_ftnref12>Blackford
*supra *note 6.

[13]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Filmmaking.docx#_ftnref13>O.R.C.
1705.09(D)

[14]<file:///C:/Users/Maryellen/Documents/Limited%20Liability%20Companies%20for%20Filmmaking.docx#_ftnref14>O.R.C.
122.85 (C)(1)(b)
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