How to Open a small Independent Prod Company?

M

Massimilian

Hi,
this i a question that many filmmakers have in mind... I know somewhere in this forum there is already
the right answer for this, but so far I could not find it.

How can a young filmmaker open a small production company to produce and present the movie to festivals? In order to keep the rights of the movie and deduct expenses?

Can you open a temporary production company for "one movie" production?

Thanks to all for any contribute,

m
 
Sort by date Sort by votes
You are in the US (I presume by your location). I'm not sure if it's worth incorporating; that would depend on how many principals (owners/investors) there are, how you want to handle taxes, and what sort of liability issues you may have.

If you don't think you're going to turn a profit at some point, you may not be able to deduct expenses. You should consult a tax adviser, but I do know that the IRS requires that your company turn a profit 2 years out of 5 (if it's a proprietorship or partnership). If you claim the expenses of your hobby and never make money, the IRS can require that you pay back taxes on the expenses you claimed. I've been in business for almost 15 years, so I have a pretty decent background in business law in the US, but I'm not the authority on the tax code. If your sole purpose is to get a write off, then you should consult a tax adviser, for sure. There may be a tax shelter that you can set up without too much trouble. I know rich people do it all the time!

Finally, you should, at the very least, keep a separate set of books on your project that tracks expenses, payouts, investments, etc. The more complete and accurate your accounting, the more better off you'll be; especially if and when you have other people investing in your venture. All you need to keep good records is a record keeping system and some discipline.

Just remember, that the IRS differentiates between hobbies (which can be very expensive) and businesses which are supposed to turn a profit at some point.

Doug
 
Upvote 0 Downvote
Massimilian said:
Hi,
this i a question that many filmmakers have in mind... I know somewhere in this forum there is already
the right answer for this, but so far I could not find it.

How can a young filmmaker open a small production company to produce and present the movie to festivals? In order to keep the rights of the movie and deduct expenses?
Click to expand...
A production company is no different than any company. A
manufacturing company buys or rents a building and makes a
product. An auto repair company buys or rents a building and
fixes cars. A "production company" make movies. And they are all
started in the same way.

There is a "small business association" in most cities - they can
help you with legal matters. Typically a business is an LLC, but
many people start their business as a Sole Proprietorship, a
General Partnership or a Joint Venture. The short version: You
will fill out the paperwork, make the required legal declarations
and get to work.

You need to know clearly what your goals are. Do you just want to
put a name on the credits of your movie? Do you need to open a
bank account using the company name? Do you have partners? Will
you work out of you home? Will you open an office and hire
employees? Have you though about the legal liability of starting
a business?

The creation is easy. Running it take a lot of work.

A Sole Proprietorship:
A sole proprietorship is the simplest form of business where one
individual conducts the business. The business owner is
personally liable for all the obligations of the business.

A General Partnership:
A General Partnership is an association of two or more persons
doing business. All partners are personally liable for the
obligations of the partnership.

Joint Venture:
A Joint Venture is two or more entities under a contractual
agreement to conduct a specific business enterprise with both
parties sharing equal responsibility. The venture is usually for
one specific project.

A Business Trust:
A Business Trust is a trust created for the primary purpose of
operating or engaging in a business. It must have a business
purpose and actually function as a business.

A Limited Partnership:
A Limited Partnership is a business arrangement operated by
general partners with unlimited personal liability and funded by
limited or silent partners who are partially liable.

Can you open a temporary production company for "one movie" production?
Click to expand...
Yes. You can create a Limited Liability Company:
A Limited Liability Company (LLC) is a legal entity that has the
option of being taxed like a partnership, but shields personal
assets from business debt like a corporation. Filing at the state
level is required.
 
Upvote 0 Downvote
I'm not sure about the US, but in the UK we often separate out the production from the production company.

So, a production company "Massive Films" decides to make a movie called "Big Monkey Tree."

Now, Massive Films doesn't want the liability of a feature film attached to them as a company. So, they set up a separate LLC company called "Monkey House Productions"

Monkey House Productions only does one thing... it makes the movie "Big Monkey Tree"

This set-up is particularly useful if the original production company does other things. Of course, if you've got a highly profitable production company doing corporate or music vids, then having the huge costs of a feature to right off the profits may work from a tax pov.

However, if your feature requires outside investment, then having your investors linked to the main company involves some risk. Some investors are actually asset strippers in disguise. They invest in the movie and then hit the production company with due diligence writs. Basically they accuse the production company of not taking the proper steps to protect the investor's investment. This allows them to step in and take over the film and the production using their own people.

Now, if you have the production linked to your main production company, you are giving the investors an opportunity to take not just your production, they have leverage to take the entire business.

However, just to put some perspective on this... this is only likely to happen if you have a project worth asset stripping, or a production company with great profits who leaves itself vulnerable with a bad feature project.
 
Last edited:
Upvote 0 Downvote
2 lawyers and 1 accountant told me that everyone is doing S-Corporations now. People are converting their LLC's to S-Corporations left and right. I own an S-Corp. The great thing about S-Corps is that you don't pay taxes until a dividend or salary is paid. Income that comes into the corporation and sits is NOT taxed.
 
Upvote 0 Downvote
Im glad this was brought up. After I graduate I would like to start a production company of my own that will get investors to finance movies that a team and I will make for the film festival market. What would I have to do to create this company? If I were to higher Directors, Cinematographers, and Editors, would they be my employees? How do I pay them legally? Also how do the taxes work for this type of thing?
 
Upvote 0 Downvote
MSiegel67 said:
Im glad this was brought up. After I graduate I would like to start a production company of my own that will get investors to finance movies that a team and I will make for the film festival market. What would I have to do to create this company? If I were to higher Directors, Cinematographers, and Editors, would they be my employees? How do I pay them legally? Also how do the taxes work for this type of thing?
Click to expand...

Your best bet is to do some small business research. Honestly, I'd be surprised if you were able to attract many investors to fund films that are made with film festivals as their goal -- that doesn't really scream profit potential to me.

As for how to handle paying people you hire, it would depend on how you establish your business, and whether these people are employees or independent contractors. The easiest method would be to bring people on as independent contractors and then issue a 1099 to each of them. That way they are responsible for paying taxes, etc.

But, I'm no business lawyer, so don't take my word for it.
 
Upvote 0 Downvote
The IRS doesn't like 1099s, so they have a fairly strict definition of what constitutes an independent contractor, vs. a W-2 employee. Your makeup artist who brings his/her own makeup would qualify as an independent contractor. Your DP, using your camera and lights may not. (for example)
 
Upvote 0 Downvote
blade_jones...what exactly do you mean by the fact that S-Corps don't pay taxes until they start paying stuff? How do taxes work in this sense? Say I have X amount of dollars and it's just sitting in the newly opened bank acount for my newly opened production company and it's sitting there and being added to until I have all my ducks in a row, i'm ready to go, and it's time to start renting equipment, flying in cast and or crew for the production...at what point and in what way do I start getting taxed on the money?
 
Upvote 0 Downvote
Will Vincent said:
Honestly, I'd be surprised if you were able to attract many investors to fund films that are made with film festivals as their goal -- that doesn't really scream profit potential to me.
Click to expand...

The goal for the films isn't the film festival. It just seems like that is the easiest way to get distribution, or even get noticed. It seems nearly impossible to get distribution any other way if you are not established. Also, don't some festivals give out cash prizes? This is also a way for investors to make money back.

If I weren't to go the film festival route, what is another way to get investors on board and make profit?
 
Upvote 0 Downvote
LittleEarthQuakes, blade is oversimplifying things a little. I have been operating as an S-Corporation for over 10 years. The deal is that all corporate profit falls to the shareholders who must file a schedule E with their 1040 return showing the profit. Therefore, a double tax is avoided (corporate tax + tax on dividends). Believe me, all profits are taxable.
 
Upvote 0 Downvote
OakStreet...so say there are two owners of the production company with one owning 75% of the company and the other 25% of the company then owner one claims and is taxed on 75% of the profits and owner 2 claims and is taxed on 25% of the profits?
 
Upvote 0 Downvote
Yup. The trick is to make sure there are no profits. :) In my company, the payroll and other expenses are managed so that the company has a small profit or loss at the end of the year. This works both ways, BTW, the stockholders can also claim the company losses against their income.
 
Upvote 0 Downvote
Ok, so theoreticly "the business" could pay out nearly all of it's money to it's employees...perhaps with a large chunk of that (or most of that money) being paid as a sallery from the business to say...the shareholders with perhaps those shareholders's taxes paid with their payroll checks and then turn around and claim company losses to help them get back some of their tax money?
 
Upvote 0 Downvote
Well, yes. As long as the losses are legitimate. Essentially, the company (at least the way I run mine) is a conduit for money. The money comes into the business, the business pays for everything that can possibly be considered a legitimate business expense (including reimbursing me for mileage on my personal vehicle at the IRS mileage rate), and it pays salaries and payroll taxes and issues W-2s.

However, like any conduit, money that doesn't come in, can't go out, so it's pretty much a net zero. If the company makes money one year, it may lose some the next year, but it can't always lose money. The biggest advantage to having the corporation (aside from being a federal employer which protects my clients from 1099 liabilities), is that the IRS is more liberal with what can be written off as a one-time expense. In a sole proprietorship, I had to depreciate all equipment purchases and even software!

Regarding the 1099 thing; the IRS enacted a ruling (I don't think you can call these "laws"), that said if one of your 1099 contractors doesn't pay their taxes, you can be held liable for the payroll taxes on what you paid them. This frightened many large corporations that were paying contractors hundreds of thousands, or millions of dollars and could incur huge liabilities. By being a federal employer, when I invoice clients, they do not take responsibility for payroll taxes.

The IRS tax code is a little hard to ingest all at once, but I've been doing this since 1993, so I've assimilated a pretty decent understanding of these things. I also have a CPA to guide me. I recommend finding a friendly CPA for guidance. They are not like attorneys. My CPA costs me about $300 a year and he's always there when I have a question.
 
Upvote 0 Downvote
For anybody reading, do yourself a favor and buy a book on opening a business, such as an LLC, and one on the tax implications of running a business. Its both easy to do but incredibly complicated to understand completely. Im in my 5th year of co-owning an LLC and now co-own/manage 4 and I am discovering new things all the time about the process.
 
Upvote 0 Downvote
Good point, Wideshot. I spent weeks actually reading IRS tax code back in the old days, and I always read the IRS newsletters I get with my 941 forms. As I mentioned previously, I keep a CPA on the line to answer questions.

My business has been my sole means of support for over 15 years. It is nice to be one's own boss, but it can also be a pain in the arse.
 
Upvote 0 Downvote
Yea, I will certainly be getting in touch with a CPA when I get ready to open my production company, and likely a lawyer at the beginning to make sure everything is starting out correctly...it's a lot to take in, but I'm trying to soak up all the knowledge I find on these forums so that i'll be doing everything right. :)
 
Upvote 0 Downvote
You must log in or register to reply here.
Back
Top