FILMMAKING IS A BUSINESS
If you’re planning on making a film for your own amusement and have no intention of trying to make money from it, you can probably skim through this section.
But if you’re like most filmmakers, you would like the possibility of selling or licensing your film some day. Whether you hope to see your film in the theaters, on cable TV, or on DVDs distributed worldwide, you’d like some return on your financial investment. It should come as no surprise then that if you want your film to make money, you need to treat your production as a business.
The first step in forming a production company is to create a business entity, such as a limited liability company (LLC), limited partnership (LP), or corporation. There are many advantages to setting up a business entity:
- You can divide the financial risk among several people. The members, partners, or shareholders of a business share in the company’s profits and losses.
- Your company is considered a legal person, and as such can enter into contracts, bring lawsuits, and hold intellectual property rights, such as the copyright to a film.
- You can separate your personal finances from the company’s finances.
- You may die someday, but your company doesn’t have to. Some kinds of businesses can last forever, and ownership interests in those companies, such as shares or membership interests, can be passed down from generation to generation.
And perhaps, most importantly:
- You can avoid personal lawsuits! If your company breaches a contract or infringes a copyright it will be the company that will pay the damages, NOT the company’s officers or individual members. However, this limited liability protection is only offered with certain kinds of business entities (see below).
BUSINESS CONCEPTS
Limitation of Liability
Some business entities, like LLCs, Corporations, and LLPs allow their members to limit their liability to the amount that they are invested in the company. The members of such companies are not personally liable for the debts or other legal claims against the company.
So, for example, if an LLC or corporation is sued for breach of contract, the most that each member or shareholder can lose is the amount of his or her investment in that company. If the company is bankrupt and has no more assets, the company’s creditors cannot collect the company’s unpaid debts from the personal assets of its members.
It is important to note, however, that the limitation of liability a company’s members might enjoy is not ironclad. There are situations in which a court will allow creditors to “pierce the corporate veil” and hold the company’s members personally liable for the debts of the company. Courts will pierce the corporate veil:
- If the company’s members or shareholders have used the company to commit fraud.
- If the company’s members or shareholders have treated the company as their alter ego—in other words, if the members fail to keep proper company records, mix their personal finances in with the assets of the company, or undercapitalize the company, leaving it without sufficient assets to perform normal business functions.
Respondeat Superior
Keep in mind that an employer, such as a production company or producer, is generally legally responsible for the actions of its employees performed during the scope of their duties. This is the Respondeat Superior doctrine.
This means that if your employee gets into a car accident while picking up cast and crew members, your company is responsible for paying the damages from any lawsuit that may arise. Similarly, if your art director infringes somebody’s copyright in creating a painting for the set, your company is responsible. Furthermore, if your employee or agent enters into a contract with a third party on your company’s behalf, your company may be bound by that contract.
If you have a limited liability entity (such as an LLC, LP, or corporation), and your company hires an employee, your company, and not you personally, will be responsible for paying the legal damages that result from your employee’s actions.
On the other hand, if the employee was hired by you, rather than by your limited liability business, you personally will be responsible for paying all claims, legal costs, and damages.
It is extra work to set up and run a limited liability business, but it may save you from having to sell your house to pay for a lawsuit caused by an employee’s actions.
Keep in mind: it’s not always clear just who is an employee and who is an independent contractor. You may think you are working only with independent contractors but you may in fact be managing employees. For help with these distinctions, see my book: The Pocket Lawyer for FIlmmakers.
