Featured Reel

Limited Liability Companies for Film
Basics of Forming LLCs

by Mary Ellen Tomazic

Independent filmmakers are busy people and often wear many hats. The producer of an independent film is often the person organizing the numerous tasks and people doing them to put a film together. To make sure he is not the one holding the bag for everything at the end of the production, the filmmaker needs a business organization that spells out who does what, who is responsible for paying for things, how those people are to work together, and under what circumstances they are to break up.

The creative rush of working on a film sometimes has the effect of putting the business organization on the back burner, but this can have dire consequences.

Like any group of people forming to do business, a film should have a formal business form, or the principals will be liable for all the debts of the project personally. If there is no business form registered, the participants will be treated and taxed as a partnership, with each partner liable for his or her divided share of the debts.

A single person making a film will be treated and taxed as a sole proprietor, and will report film income and debts as his own, on his personal income tax form. The organization form which is the easiest and most suited for a film production involving a group of people is the Limited Liability Company, or LLC.  

An LLC can consist of a single owner or many members; it can be managed by the members themselves, or by an outside managing company that is not part of the LLC. This is 

all spelled out in the LLC’s operating agreement, the part of the Articles of Organization[1] which sets out not only the people who will be members of the LLC and what their role will be, but the contributions they will make to the company.

It is essential to detail every aspect of the company and how it will be run in the operating agreement. This will help to avoid the necessity of the disagreeing members hashing out what they meant in a court setting, which can be very expensive.

There are several helpful checklists in Blackford Business Organizations on Limited Liability Companies which will make sure the owner(s) do all that is required by law in the formation of the company. It sets out mandatory provisions of the Articles of Organization, such as the name of the company; its purpose; its duration, unless it is to be perpetual; its address, and statutory agent.[2]

A film LLC may be formed for the production of a single film, and thus may have a limited duration with more detailed provisions in the event of the termination of the company.

An LLC formed by a group of members to produce a number of films may have a perpetual duration and have more detailed rules for allocating profits and losses from the operation. One caveat for the formation of multiple LLCs for individual movies is that the companies must remain separate, with separate offices, bank accounts, recordkeeping, and expenditures. Any commingling of funds between multiple LLCs with the same or similar members may result in the voiding of the business form as a `sham’ or `shell’ company, which may allow creditors to go after the assets of the solvent LLC or even the alter ego of the company, the principal members.

It may be tempting to share funds between solvent and insolvent films if one movie produced by the same group of people makes money and another does not, but in exchange for limiting the liability of the principals for debts of the company, strict recordkeeping and separate books are required to use the LLC form. If the company is sued for a personal injury or contract breach, the principals may end up being liable to the injured party if there is no real evidence that the LLC form has been complied with.

To avoid being sued, the members or principals of an LLC comprising the film production itself should make sure all contracts with the participants, vendors, licensors and members are solid, clear, and not capable of being interpreted more than one way. Address all issues – make sure there are provisions for enforcement, recordkeeping and auditing. The contract elements of offer, acceptance, and consideration (some value or benefit given) should be clear in your releases for performers and crew.

All the intellectual property used in your film (sounds and images) should be licensed or permission obtained for their use from the copyright or trademark holders. Copyright clearinghouses and music licensing companies and websites can be utilized to help with the clearances. This allows the filmmaker to obtain distribution and errors and omissions insurance as well.[3] 

Also, possible tax liens and penalties could accrue if the LLC does not pay employment or other taxes incurred by the company’s activities. If there are employees paid salaries or wages, the filmmaker must deduct employment taxes, social security and disability insurance from their pay. The Screen Actors Guild contracts require such deductions, as well as payments to the  SAG-Producers Pension and Health Plans.[4]  

Another checklist gives provisions that could be included in the Operating Agreement, but are not mandatory, such as management form; rights to transfer membership interests, allocation of profits, losses, gain and credits; voting requirements; dispute resolution procedures; specification of events that will cause dissolution of the company;[5] adoption of compliance, sexual harassment, non-discrimination and other policies, and a code of ethics; setting up of bank accounts; compensation plans; and what is to be done when a member dies or becomes incompetent.[6]

Records of the stated contributions are required to be kept by the company[7] and are usually provided in an attachment to the Operating Agreement. Each member’s contribution may be either in cash, property, services rendered, a promissory note, or any other binding obligation to contribute cash or property or to perform services; by providing any other benefit to the limited liability company; or by any combination of these.[8]

A promise by a member to contribute to the limited liability company is not enforceable unless it is in writing signed by the member.[9] After promising to contribute to the LLC, the member is liable for that contribution even if the member is unable to perform the promise because of death, disability, or other reason. If the member is unable to contribute the promised property or services, the LLC has the option of compelling the member to contribute the cash value equal to the portion of the stated value of the contribution the member has failed to make.[10]

Provisions about the contributions of members can include buy and sell arrangements and self-dealing rules for the members; establishment of a capital account for each member, and the method of accounting to be used to determine additions or subtractions from the capital account; and determination of the fair market value by members or managers if property other than cash is received.[11]

The LLC also has other rights under Ohio law against the member who has failed to contribute what he promised to the LLC. However, by the consent of all the members, the failure of a member to make a promised contribution or to return money or other property paid or distributed in violation of the LLC laws may be compromised, unless otherwise stated in the operating agreement.[12]

Filmmakers are creative people, who gather together with other friends and artists to make a movie, but things can get decidedly unfriendly if the duties and responsibilities of each participant are not spelled out.

Filmmaking can be an expensive proposition, and even a small independent film can easily cost upwards of $100,000. The least amount of production expenditures spent in Ohio that will qualify the producers for the Ohio Film Tax Credit consideration is $300,000.[13]

Rather than subjecting your house or other property to a lien for a film debt, a filmmaker should take the time to comply with the statutory and practical requirements of the Limited Liability Company form. It will be well worth it in the long run in making sure that debts or even the splitting of profits do not become an unnecessary concern.

[1] O.R.C. 1705.04.
[2] Jason C. Blackford, Baldwin’s Ohio Practice, Blackford Business Organizations 1, Ch. 14 (West 2009).
[3] See Tomazic, Legally Obtaining Rights to Music for Your Film, Parts I & III (2011) available at www.reelgrok.com,www.reeltvnetwork.com) or from the Author. 
[4] Screen Actors Guild Basic Agreement 34, 34 (2005).
[5] O.R.C. 1705.43(A)(2).
[6] Blackford, supra note 6.
[7] O.R.C. 1705.28.
[8] O.R.C. 1705.09(A).
[9] O.R.C. 1705.09(B).
[10] O.R.C. 1705.09(C).
[11] Blackford supra note 6.
[12] O.R.C. 1705.09(D)
[13] O.R.C. 122.85 (C)(1)(b)

Mary Ellen Tomazic is an attorney in Cleveland specializing in entertainment issue
such as copyright, trademarks, contracts and licenses for musical groups and filmmakers.