TYPES OF BUSINESS ENTITIES
The first step in establishing your business is selecting the type of company you will establish.
Producers typically do business as one of the following kinds of companies:
- Sole proprietorship
- General partnership
- Limited partnership
- C. Corporation
- S. Corporation
- LLC
Some business entities, like the sole proprietorship or the general partnership, do not require any legal formalities to start up. Other kinds of businesses, such as the limited liability company (LLC), the limited partnership (LP), or the corporation (S. Corp, C.-Corp.), can only be created by filing and registering with the state government.
TIP: [The aforementioned Pocket Lawyer for Filmmakers] cannot cover all of the legal requirements for creating a business; there are entire books devoted to that subject alone. The filmmaker is encouraged to seek an attorney experienced with setting up business organizations.
Sole Proprietorship
The sole proprietorship is the default form of business. You are sole proprietor—automatically—the moment you start doing business by yourself without having formed another kind of company.
There are some advantages to being a sole proprietor:
- Virtually no legal paperwork is involved.
- Decision making is easy because there is only one member of the company—you.
However, there is one huge disadvantage to sole proprietorships:
- There is no limitation of liability. If your business is sued, you are sued. If the business defaults on its debts, you personally must pay the debts.
WHAT’S IN A NAME? THE D.B.A. CERTIFICATE
The law begins with the presumption that sole proprietors do business under their own name (e.g., “Sasha Collins”). However, if you want to operate your sole proprietorship under a name that is different from your own (e.g., “Bongo Monkey Pictures”), you will need to file a -fictitious name statement with the city government where your business is located. These are also known as d.b.a. certificates (which stands for “doing business as”). Additionally, you should also perform business name and trademark searches to make sure that your proposed name is not currently being used by another company.
General Partnership
A partnership may be formed when two or more people work together to own and operate a business for profit. There is usually no government filing required to create a general partnership, although it is recommended that partners have a partnership agreement or other contract which lays out each partners respective rights and duties.
A partnership carries with it certain legal implications, such as:
- Fiduciary duty. Each partner has a heightened legal duty of loyalty and good faith toward his or her partners.
- Unlimited Personal Liability. Generally, each partner is personally liable for those debts and obligations of his partners incurred within the scope of the partnership business.
- Partnership Property. Unless there is a partnership agreement that says otherwise, the partnership—and not the individual partners—will own all property acquired by partnership funds, brought into the partnership, or contributed to the partnership.
- Partnership Proceeds. Unless there is a partnership agreement that says otherwise, all partners will share equally in the income and losses of the partnership, regardless of the amount of work they actually do in the management of the business.
Two or more people who work together in a common business enterprise are often surprised when the court determines that they are in fact partners in a general partnership.
One variation on the general partnership is the Limited Liability Partnership (LLP), not to be confused with the Limited Partnership (LP)(see below). Because the right to form a Limited Liability Partnership is often restricted to professionals, such as doctors, lawyers, and architects, it will not be discussed [here].
CAUTION! Be very careful when deciding to do business as a general partnership! Because general partners must answer for the debts of the other partners made during the scope of the business, choosing the wrong partner can get you into personal financial -trouble.
Example:
Carlos and Kim are general partners in KimCarlos Productions, a startup motion picture company hoping to find financing for their first motion picture, “Broken Beer Bottle Blues.”
For the film, Kim decides that she needs to do extensive research on the effects of drinking and depression. Over a 2-month period she lives in a neighborhood bar, pounding back expensive imported beer, and videotaping herself with the latest high-definition video camera, purchased with an eye toward using it for the film. Needless to say, she runs up quite a bar tab and electronics bill. When her creditors come a-knockin’, they can attempt to collect the debt from Carlos personally, as well as from KimCarlos Productions and Kim personally.
