Independent filmmakers are by nature risk takers. They also are entrepreneurs. The next few sections address several topics that will inform your creative decisions and may help you avoid “unexpected” financial problems.
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:
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.
• 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.
• 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 is subject to self-employment tax.
• For some artists, forming an LLC might be a better choice.
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. However, in this instance it might have been better for the partners to get a contract management software as this keeps things altogether and makes looking at contracts easier.
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.
• 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.
• 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 (LLCs)
A limited liability company (LLC), which has become 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 with a similar product or service is using that name; you may also want to ask an attorney to perform a trademark search on your chosen name.
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.
• 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.
• 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.
• 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, the most complex of the forms 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.
Are you serving coffee and donuts or renting equipment? If so, you have a budget. Every filmmaker has a limited amount of money to spend, and preparing a written budget will inform your decision-making – from choosing a business structure to limiting the number of locations, from maxing out your credit cards to seeking grant support.
Budgets are financial action plans that translate creative aspirations into dollars and establish priorities. They outline specific expense and income categories during a specific time period, usually the duration of the project. The overall goal is to achieve maximum benefit at minimum cost. In addition, a well-conceived budget can help you avoid “unexpected” financial problems and provide a meaningful tool to monitor and control your finances so there is enough money to do a final cut.
Be realistic. Although a budget is really just a best guess, most filmmakers can predict expenses with a fair degree of certainty once they have broken down their scripts, prepared a realistic production schedule, and recognized that projected expenses must be in line with available income. The key is to identify the cornerstone elements of the film and build the budget around those items.
Broad categories of no-budget, low-budget, medium-budget and high-budget each set in motion assumptions about the final product. For example, a no- or low-budget film must be filmed locally or in areas that can double for other locations because the budget cannot accommodate travel expenses. For big budget films, the budgeting process also has external purposes; the costs of every element of the production must be made clear to investors and the completion bond company.
The budgeting process can be approached in several ways, from a simple Excel spreadsheet with a few line items to sophisticated software packages, such as Movie Magic Budgeting and EP Budgeting, or more affordable products like Gorilla Student and Easy Budget.
Sample Budgets (coming soon)
Credit cards are a common (yet often risky!) way for filmmakers to acquire short-term high-interest loans. To make Hollywood Shuffle, for example, Robert Townsend put $40,000 of the film’s $100,000 budget on ten personal credit cards. Director Kevin Smith maxed out several cards to make Clerks and Richard Hatch financed the production of Battlestar Galactica: The Second Coming partly through credit cards.
But many filmmakers have discovered that the legend of the credit-card-financed film can lead to serious financial and personal problems.
Likewise, it’s imperative to consider how you are going to sell and take payments for your film(s). We’d advise considering a standalone solution, as well as mobile payment solutions.
If plastic is going to be your executive producer, invest some time in finding the best card. The American Institute of Certified Public Accountants’ 360 Degrees of Financial Literacy site recommends a two-step process:
1) Learn the lingo. In order to evaluate credit card offers, you’ll need to learn the language they use. Here are some of the more important terms:
• Annual percentage rate (APR): The cost of credit as indicated by a yearly (fixed or variable) interest rate. This rate and the periodic rate (the APR expressed as a daily or monthly factor) must be disclosed to you before you become obligated on the card.
• Balance computation method: The formula used to determine the outstanding balance on which you’re charged interest for the billing period.
• Finance charge: The cost of credit for the billing cycle, expressed as a dollar amount and determined by multiplying the outstanding balance by the periodic rate.
• Fees: Charges (other than the finance charge) that may be levied against your account. Common examples include an annual fee, cash advance fees, balance transfer fees, late payment fees, and over-the-limit fees.
• Grace period: The length of time prior to your payment due date during which you may pay off your account without incurring any finance charge.
2) Once you can talk the talk, ask questions. Any credit card will cost you something, but depending on the terms and conditions, some are more costly than others. To do some comparison shopping, click here. When evaluating a credit card offer, here are some points to consider:
• What’s the interest rate? Is it fixed or variable? If variable, how is it calculated?
• Will you be charged different interest rates for purchases, balance transfers and cash advances?
• What method determines the outstanding balance used to calculate the finance charge?
• Is there an annual fee, and what other fees may be charged?
• What’s the length of the grace period (if any)?
• If you’ll carry a balance from month to month, you’ll want a low interest rate and a balance calculation method that minimizes your finance charges.
Many filmmakers obtain loans from family and friends to finance their films. Generally, these loans are unsecured (i.e., no collateral is required) and interest-free. Consult a lawyer if you need to prepare a promissory note for one of these loans (a promissory note is just the promise to repay written out in contract form).
You also should consult a lawyer if you plan to raise money — no matter how small the amount involved — from private investors who will be contributing funds in exchange for an ownership interest in your film. This sort of “equity financing” must comply with complex state and federal securities laws. Needless to say, offering such securities is not a “do-it-yourself” task, and it would be unwise (no, it would be stupid!) to “cut and paste” portions of documents that you find on the Internet to manufacture such agreements on your own. So don’t do it!
Corporations support the arts and humanities through direct-giving programs, through separate, company-sponsored foundations, or both. But charitable giving is only part of the equation. Increasingly, companies are investing marketing dollars in popular events and independent films in return for access to consumers. This support is not philanthropy; it’s sponsorship.
Trusting your instincts and maintaining open communication will create a partnership that will fulfill the sponsor’s needs without damaging the integrity of your film. Pricing the sponsorship can be a challenge. Generally, market size, demographics, sponsorship benefits, and the prestige of the particular project are taken into account when determining value.
The terms of a sponsorship agreement should be put in writing. Generally, a letter of agreement will suffice. But if a lot of money is involved, drafting a contract with the assistance of an attorney is recommended. At minimum, a letter of agreement should include:
• A brief description of the film and the anticipated completion date;
• A detailed description of how the sponsor will be acknowledged (film, website, links, printed materials, signage, etc.);
• A statement that the sponsor’s logo will be used in its entirety and without any alteration;
• Any additional benefits you decide to include, such complimentary tickets to screenings;
• Subject to prior approval, the inclusion of any rights the sponsor might have to indicate its association with the film in advertising and promotion;
• Refund procedures (e.g., the money will be returned if the film is not made by a certain date);
• A statement that the agreement does not constitute a partnership or joint venture relationship between the sponsor and the filmmaker;
• A statement of whether the sponsorship is exclusive;
• A statement making it clear that the sponsor will not impose any artistic judgments on the film or in any way attempt to determine the content of the film;
• A statement of the sponsorship fee and payment schedule;
• A boiler plate clause addressing the full agreement, the governing law, and dispute resolution;
• The filmmaker’s dated signature and address; and
• The sponsor’s dated signatures.
Most grants are awarded to nonprofit organizations, rather than directly to individuals, and those seeking funding should expect to encounter stiff competition for grant dollars.
For guidance on raising money for noncommercial projects, we encourage you to read Morrie Warshawski’s Shaking the Money Tree: How to Get Grants and Donations for Film and Video. Warshawski, who is one of our favorite consultants, provides a step-by-step guide that covers planning a project, doing research, writing a proposal, soliciting donations from individuals, and more. The appendices include a bibliography of publications and resources, a listing of media arts centers, sample proposals, a sample direct-mail letter and information about how to raise funds through a house party.
Carole Lee Dean’s The Art of Film Funding: Alternative Financing Concepts covers proposal writing, researching grantmakers, fund-raising from individuals and businesses, public funding, branding, partnerships, tax laws and more.
The Foundation Center’s Foundation Grants to Individuals, which is published in print form and in an online subscription-based database, includes information on more than 6,500 foundations. Information about how to apply for funding from each foundation is included. All Foundation Center libraries provide free public access to the print version and some may have the online version. You also can sign up for one, three or six months on-line access at a very reasonable cost. Finally, there is online training available, also for a very reasonable fee.
The International Documentary Association lists grants with deadlines, grants without deadlines and information on fiscal sponsorship.
New York Foundation for the Arts, a nonprofit arts service organization, hosts NYFA Source, a national data base of fellowships, fiscal sponsors, awards, services and publications for artists of all disciplines.
Though daunting, raising money to make a film is not an impossible task, and fiscal sponsorship can be an invaluable means to securing funding. Depending on the nature of your project, you may want to consider affiliation with a tax-exempt organization in order to broaden your base of potential support.
By partnering with an established 501(c)(3) organization, artist-driven projects with nonprofit goals can apply for grants and solicit tax-deductible donations to support their work. The Sponsor’s tax-exempt status, which includes board oversight, inspires donor confidence because the sponsoring organization has a recognized charitable purpose, has a structure for accomplishing its goals, and is accountable to the public.
In this type of arrangement, a nonprofit would act as your fiscal agent, receiving and administering the grant (or donation) for you. It is important that you begin looking for a sponsor at the same time that you start researching potential grantmakers and/or donors.
In some cities, media-related nonprofit organizations provide fiscal sponsorship as a core service. Alternatively, a filmmaker can find a nonprofit organization whose work complements the purpose and/or constituency of the proposed project. For example, a historical society might be willing to be the fiscal sponsor of a documentary about World War II veterans.
At minimum, the Sponsor signs grant contracts, receives the awarded funds, sets up an account for the Project, writes checks, and issues the charitable donation receipts required by the Internal Revenue Service. But a Sponsor may take a much larger role. It could be an active fundraising partner, provide space or equipment or offer consultation services.
In return for its services, the Sponsor usually takes an administrative fee, which can range from 2 percent to 15 percent (or more) of monies received on behalf of the Project. Although fees vary, 5 percent to 10 percent is generally considered typical and fair.
The key to understanding fiscal sponsorship is that there are three players — the Project (an artist, artists’ collaboration or emerging arts organization), the Sponsor (a tax-exempt organization) and the Grantmaker (corporation, foundation, federated campaign, government arts agency or individual arts patron) — and the players must be clear about their expectations and responsibilities. In addition, those working on the Project must be willing to submit a detailed proposal to a Grantmaker and then execute the Project as outlined in the proposal. Some artists find this arrangement too restrictive.
Typically, the filmmaker begins the process by identifying a potential funding source. But the legal status of the Project is an obstacle because most foundations, corporations and government arts funding agencies restrict their grantmaking to tax-exempt organizations. So the filmmaker must find a Sponsor — commonly called an “umbrella” or “fiscal agent” — an organization with 501(c)(3) status that will sign on as a sort of chaperone, lending its tax-exempt status to the Project and providing the oversight required by the donor.
All too often this relationship is formed in haste, with little foresight or judgment. Unfortunately, the way some artists approach the need for a fiscal sponsor might be likened to some teens lurking around a movie theatre ticket line, desiring admisshion to an R-rated movie, and looking for an adult who will accompany them into the theatre. As soon as the tickets are sold, they ditch the adults.
Similarly, some artists mistakenly believe their relationship with a fiscal sponsor to be just as disposable – after the sponsor signs the grant application they can simply wave goodbye and enjoy the benefits of the grant. Other artists are less casual, but might – along with the Sponsor – misunderstand crucial aspects of the relationship, and make assumptions at the outset that cause trouble down the road.
Fiscal sponsorship offers tremendous opportunities for experimentation, diversity, social change, collaboration and a willingness to support the work created by artists who are not normally or regularly employed by nonprofit organizations or major cultural institutions.
VLAA stands ready to support the legal and accounting components of creating and sustaining successful fiscal sponsorship projects and programs in Missouri and Southwestern Illinois. For more information, please contact us.
Fiscal Sponsor Directory is a tool created by the San Francisco Study Center to help connect community projects with fiscal sponsors; it is also a forum for fostering understanding of that relationship and its impact on the nonprofit sector.
To encourage the production of film, television and video projects both Illinois and Missouri offer tax credits for filmmakers.
The Illinois Film Production Tax Credit is available for projects 29 minutes or under that spend at least $50,000 in Illinois and projects over 30 minutes that spend at least $100,000. Production companies must also be willing to promote diversity by making a good faith effort to hire minorities.
Under Missouri’s Film Production Tax Credit program, the Department of Economic Development may issue a film production company state income tax credits equaling up to 35 percent of the company’s expenditures in Missouri. Any film production company with an expected instate expenditure budget of at least $100,000 for films more than 30 minutes in length and at least $50,000 for films less than 30 minutes in length is eligible.
Insurance needs will vary from film project to film project depending on the scale, location, equipment, cast, crew and budget of your production. For student films, the school should supply the insurance coverage and any necessary certificates.
Workers’ Compensation is a no-fault system that provides replacement income and covers the medical expenses of employees (cast and crew) who are injured on the job. It is regulated by state law. Any work-related illness or injury (except those that are intentionally self-inflicted or caused by illegal substance abuse) is covered by workers’ compensation insurance. The law provides for medical care to cure the injury, payment for lost wages and payment for permanent disabilities. Workers’ compensation insurance is purchased through private insurance carriers. The premium depends on job classification codes that rate high-hazard and low-hazard occupations — and payroll — the higher the payroll the higher the premium. Independent contractors will probably be considered employees, but ask to be sure. If you have suffered an injury at work then you should check out something like this injury law firm to help you understand what the next step would be.
Filming in a public park? At a university or church? In an office, retail establishment or restaurant? General liability insurance will likely be required. It covers against damage to the space itself and injury to those in attendance who are not working on the film. But it does not protect against liability caused by an employee automobile accident while on the job. Short-term and annual policies are available. Some experts say $2 million of liability insurance should be plenty, while others recommend $1 million.
If you are renting equipment, it may not be necessary to obtain your own insurance because the equipment probably is insured through the rental company. However, if you plan on purchasing or borrowing equipment, even if it is from a friend, you should consider equipment insurance. You don’t want to get halfway through filming only to discover that the camera that just broke isn’t covered.
You may want to check out the film production insurance policies offered by Fractured Atlas, a New York-based nonprofit organization that provides services to artists and arts organizations. You will have to join the organization to take advantage of its insurance, which is offered only on an annual basis. But the affordable rates will make it well worth the membership fee:
For budgets under $100,000, coverage runs about $425 for liability alone or $600-$700 with equipment rental coverage added. Filmmakers working in most states also can purchase workers’ compensation through Fractured Atlas, and volunteers also can be covered.
Johnsonese Brokerage offers affordable per-project insurance packages that can include workers’ compensation coverage. The company is well known among Midwest filmmakers for its helpful service.
For workers’ compensation coverage, another option is to use a paymaster service such as Falcon Paymasters. The company, which becomes the employer of record for all talent and crew members it pays, includes workers’ compensation coverage in its menu of services.
Errors & Omissions Insurance
Commercial distributors and most broadcasters require E&O Insurance. It provides protection against lawsuits alleging unauthorized use of titles, copyrighted material, ideas, format, characters, plots, plagiarism, unfair competition, defamation and invasion of privacy. This insurance typically requires the counsel of an entertainment lawyer who will review your script, clearances and releases.
For documentary filmmakers, there is good news about E&O coverage: The four major providers have new programs to cover fair use claims that are consistent with the Documentary Filmmakers’ Statement of Best Practices in Fair Use.