For Independent Filmmakers

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Our Independent Filmmaker pages are loosely organized in the chronological order of legal and business matters you might face throughout your project -- from treatment to final cut. Please help us improve our site. If you notice an error or have a suggestion for a link or additional information, please contact us.

THIS WEB SITE HAS BEEN PREPARED FOR EDUCATIONAL AND INFORMATIONAL PURPOSES ONLY AND IS NOT LEGAL ADVICE OR A LEGAL OPINION. ONLY YOUR ATTORNEY CAN ADVISE YOU ABOUT WHICH LAWS ARE APPLICABLE TO YOUR SPECIFIC SITUATION.

Should You Incorporate?

There are several ways to structure a business, each having advantages and disadvantages to be weighed against practical needs and goals. In making a choice, filmmakers should consider the following variables:

• Your vision for the business;.
• The level of control you want to have;
• How many people will own the business;
• The level of “structure” with which you are comfortable;
• Financing;
• Risk and liability 1evels;
• Tax implications; and
• Continuity.

There is no right or wrong structure, and it is possible to change the structure at a later date if your business grows or the risks of personal liability increase.

What follows is a general overview of the basic forms of business entities and the requirements for their formation in Missouri and Illinois. VLAA encourages you to obtain the assistance of a qualified attorney and/or accountant before finalizing your choice of legal entity.

Sole Proprietorships

For simplicity, most artists operate as sole proprietors. If you are working on your own and making money from your art on a freelance basis, you are automatically a sole proprietorship (even if you also have a regular day job).

Sole proprietorships are owned by one person, usually the individual who has day-to-day responsibility for running the business. Sole proprietors have total control over all their business decisions. They also assume complete responsibility for any liabilities or debts.

As sole owner of the assets, the sole proprietor is entitled to all of the profits of the business, but also is personally responsible for all of its liabilities and obligations. There is no shield from liability other than insurance coverage. In other words, business creditors can go after both the business’s assets and your personal assets, including your bank account, car or house. The reverse also is true: your personal creditors can make claims against your business’s assets.

The income generated by the business is considered personal income and is taxed accordingly by adding Schedule C to IRS Form 1040 to calculate the business’s profit or loss and then completing Schedule SE to figure self-employment tax.

No legal steps are required to form a sole proprietorship. However, when the business name is substantially different from the owner’s full legal name, registration is required. In Illinois, file with your local county clerk’s office. In Missouri, the “fictitious name” of the business should be registered with the Secretary of State by filing a short form and paying a nominal fee.

Registering a Fictitious Business Name or Assumed Business Name does not guarantee exclusive use of that name. Name registration simply provides a vehicle for checking the ownership of a business. Essentially, it notifies the public that you are “doing business as” someone other than yourself and allows creditors to know who is responsible for the activities of the business.

To protect the name, you should do a thorough online search to make sure that no other business that is offering a similar product or service is using the name you have selected and may want to ask an attorney to perform a trademark search.

In addition to name registration, some cities and counties require businesses to register or obtain licenses.

Many artists initially operate as sole proprietors and graduate to a different type of business-type entity, when appropriate.

Advantages

• Easiest and least-expensive form of ownership to organize.
• No lawyer needed.
• Simple to operate; few administrative burdens.
• Sole proprietors are in complete control, and within the parameters of the law, may make decisions as they see fit.
• Sole proprietors receive all income generated by the business to keep or reinvest.
• Profits from the business flow through directly to the owner’s personal tax return.
• Easy to dissolve.

Disadvantages

• Sole proprietors have unlimited liability and are legally responsible for all debts against the business. Their personal assets are at risk.
• No continuity beyond the proprietor, although the assets will be transferred as provided in the proprietor’s will.
• Securing a small-business bank loan may be difficult.
• Owners are not defined by law as employees and consequently are not eligible for unemployment benefits.
• All net income subject to self-employment tax.
• For some artists, forming an LLC might be a better choice.

Partnerships

A partnership is essentially the same as a sole proprietorship, except there is more than one owner. Each partner contributes money, property, labor, and/or skill and expects to share in the profits and losses of the business. Generally, this form of business organization is created by a formal agreement, but a partnership may simply be based on an oral agreement or may even be implied by the conduct of the parties.

Generally, the term “partnership” refers to a general partnership. Under a general partnership structure, the partners share decision-making, profits and losses. They also are personally liable for the business and its debt, regardless of which partner incurred the liability.

You don’t have to do anything formal to create a general partnership. When two or more people contribute towards a business and share in the profits without having any other agreement about the form of the business, the business is automatically classified as a partnership. Partners divide responsibility for management and liability, and they share profit or loss according to their internal agreement. Equal shares are assumed unless there is a written agreement that states otherwise.

Similarly, in the absence of a written agreement, any partner can bind the partnership and the individual partners to contracts or other legal obligations without the approval of the other partners.

Although the partnership can be formed by a handshake, it is strongly recommended that an attorney prepare a written partnership agreement. Typically, the agreement sets forth the capital – money, services, supplies or equipment – contributed by each partner; how much time each partner will devote and what his or her functions will be, including who has primary responsibility for accounting and the preparation of financial documents; how decisions will be made; how profits (or losses) and copyright interests will be shared; provisions for taking profits out of the company; how disputes will be resolved; how future partners will be admitted; how partners can be bought out and what steps will be taken to dissolve the partnership, if needed.

The most compelling reasons for preparing this agreement are to avoid misunderstandings and to guarantee the continued existence of the partnership in the event one member leaves the business; without an agreement, the departure of that partner automatically ends the partnership.

Missouri and Illinois also permit the formation of limited liability partnerships. Under this structure, most of the partners have limited liability (to the extent of their investment) and limited input regarding management decisions. Forming a limited partnership is more complex and formal than forming a general partnership and requires the assistance of a lawyer.

A partnership itself generally does not pay income taxes. A partnership files an annual information tax return with the IRS, Form 1065, stating all items of taxable income and tax deductions. Included is Schedule K-1, which details each partner’s share of taxable income and tax deductions. The partnership income is considered personal income and is taxed as such. Partners are not employees and should not be issued a Form W-2.

A partnership with a business name other than the name(s) of the partners must also register the name with the Missouri Secretary of State. In Illinois, assumed business names are registered with the county clerk (see explanation under Sole Proprietorship).

Partnerships should keep separate bank accounts and financial records for the business.

Advantages

• Partnerships are relatively easy to establish; however, time should be invested in developing the partnership agreement.
• Less administration than corporations.
• With more than one owner, the ability to raise funds may be increased.
• The profits from the business flow directly through to the partners’ personal tax returns.
• The business usually will benefit from partners who have complementary skills.

Disadvantages

• Partners are jointly and individually liable for the actions of the other partners.
• Profits must be shared.
• Since decisions are shared, disagreements can occur.
• Partners are not defined by law as employees, and consequently are not eligible for unemployment benefits.
• The partnership may have a limited life that may end upon the withdrawal or death of a partner.
• Upon dissolution, partners remain liable for the firm’s existing obligations.

Limited Liability Companies

A limited liability company (LLC), an increasingly popular form of business structure, is an unincorporated business that provides owners with limited liability, flow-through tax treatment and operating flexibility. Many lawyers encourage artists and other sole proprietors to seriously consider this option.

As the name implies, this model provides limited liability. If the business defaults on a lease or mortgage, personal assets, such as your home, car, and other collateral are protected unless you personally guarantee a loan or lease for the business or fail to run the LLC in a financially responsible manner.

Owners of an LLC are called members. Members may include individuals, corporations or other LLCs. There is no maximum number of members. Missouri and Illinois permit “single member” LLCs — those having only one owner.

An LLC may be managed by its members or by a manager, who may or may not be a member of the LLC. If a manager is selected to run the LLC, the members often are more like passive investors, similar to partners in a limited partnership or shareholders in a corporation.

For federal and state income tax purposes, the profits or losses of the business pass directly through to the member’s personal income tax return, Form 1040. The LLC files a Form 1065, and then lists each member’s taxable profit on Form K-1.

An LLC cannot be established in Missouri or Illinois until Articles of Organization are filed with the Secretary of State. In Missouri, the filing fee is $105; in Illinois the fee is $500. The short form requires such information as the firm’s name, its purpose, the name and address of its registered agent in Missouri, the names and addresses of each organizer, dissolution parameters and its management form. The management structure is described in a document called the Operating Agreement, which sets out the internal rules of the business. It is very important to have an Operating Agreement if your LLC has two or more members.

Before choosing a name for your LLC, you should do a thorough online search to make sure that no other business that is offering a similar product or service is using the name, and you may want to ask an attorney to perform a trademark search.

Although the forms look easy to complete, a lawyer should be consulted when forming an LLC. In Missouri, once the formation paperwork is filed with the Secretary of State and the LLC is established, no additional documents or annual reports are required. Annual registration, including a modest fee, is required in Illinois.

Advantages

• Combines tax advantages of partnership with liability protection of a corporation.
• Because of its liability protection, the LLC is becoming a popular business model for small-business owners.
• Compared to corporations, LLCs are inexpensive to establish and not as complex to operate.
• Flexibility.
• Members are compensated using either distributions of profit or guaranteed payments. (As a member of an LLC, you are not allowed to pay yourself wages.)
• Members can contribute capital or other assets to the LLC. They can take money out by taking a repayment of the loan (plus interest), a distribution of profit or a guaranteed payment.
• An LLC is a pass-through entity unless it chooses to be otherwise.
• If any of the members die, the LLC can continue to exist – subject to the unanimous positive vote on the part of all remaining members.

Disadvantages

• Unlike a sole proprietorship, you must file the correct paperwork to gain (and in Illinois, maintain) LLC status. Working with a lawyer is strongly recommended.
• Each member’s share of profits represents taxable income whether or not a member’s share is distributed to him or her.
• The managing member’s share of the bottom-line profit of the LLC is considered earned income, and therefore is subject to self-employment tax.
• LLC laws vary from state to state.
• Members who have management authority, debt responsibility or who materially participate are exposed to self-employment tax.
• Operating in other states on a regular basis may require registration and associated fees.

Corporations

Corporations, the most complex form of organization, are entities with lives separate from their owners and are subject to considerable government regulation and reporting requirements.

Corporations have shareholders that enjoy limited liability (provided the appropriate corporate formalities are observed). Depending on its structure, a corporation either files a tax return and pays all taxes or, if it is an S-Corporation, it transfers profits and/or losses to the individual shareholders’ tax return in proportion to stock ownership. Consult a lawyer and an accountant before forming a corporation.

A nonprofit corporation is the organizational form used by most arts organizations. It has most of the same advantages as a for-profit corporation. Under this structure, however, the corporation does not issue stock or pay dividends. Arts organizations typically incorporate as nonprofit corporations to provide continuity and structure, qualify for tax-exempt status, apply for grants, and protect officers and directors against personal liability. For more information, Missouri and Southwestern Illinois residents should request a copy of VLAA’s Nonprofit Incorporation Workbook.

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