Britney, Inc.? How about JLo, LLC? Sound crazy? Maybe not. Celebrities often have significant assets, major investments, and even employees. They also fall prey to lawsuits and subject themselves to personal liability. Given these factors, corporate formation is one way for celebrities to shield against personal liability.
To understand why a celebrity might incorporate, let's look at the advantages of incorporating a business. Incorporating protects the owners' personal assets from corporate creditors and lawsuits. For example, a court judgment against Justin Timberlake, Inc. might say the company owes a creditor $200,000. This means Justin typically won't be forced to use personal assets, such as his house, to repay the debt. Because only corporate assets are eligible to repay business debts, Justin will only lose the money he invested in the corporation, not his total worth.
|Just like the rest of us, celebrities encounter business situations that can expose them to personal liability. Corporate formation can help lower the risk.|
When a celebrity incorporates, tax advantages abound. An incorporation is a separate and distinct legal entity. Because of this, effective planning allows celebrities to save big at tax time. For example, if Michael Jackson owns a building, he can rent this building as an office facility for his corporation. This allows him to claim depreciation and make deductions, and the corporation can claim the rental expense. Sole proprietors aren't allowed to take advantage of these kinds of corporate tax incentives.
There are some circumstances in which limited liability will not protect a celebrity's personal assets. A corporation's owner can be held personally liable in some instances. For example, owners are liable if they personally and directly injure someone, such as a member of the paparazzi. Personally guaranteeing a bank loan or a business debt on which the corporation defaults leaves the individual responsible. Owners are personally responsible if they fail to deposit taxes withheld from employees' wages. Celebrities aren't protected with the corporate guise if they are intentionally fraudulent or engage in illegal activity that causes harm to the company or to someone else. Also, the corporation must be maintained as a separate legal entity, not an extension of the celebrity's personal affairs.
In some circumstances courts can rule that a corporation doesn't really exist and that its owners are really doing business as individuals who are personally liable for their acts. This might happen if a celebrity fails to follow routine corporate formalities such as: adequately capitalizing the corporation, regularly holding meetings of directors and shareholders, or keeping business records and transactions separate from those of the owners.
As with any other corporation, celebrity owners must observe certain formalities to retain the corporation's status as a separate entity. Specifically, corporations must: i) hold annual shareholders' and directors' meetings; ii) keep minutes of shareholders' and directors' major decisions; iii) make sure that corporate officers and directors sign documents in the name of the corporation; iv) maintain separate bank accounts from their owners; v) keep detailed financial records, and vi) file a separate corporate income tax return.
Just like the rest of us, celebrities encounter business situations that can expose them to personal liability. Corporate formation can help lower the risk. Now, John Travolta, Inc. might not sound so strange after all.