The entertainment industry is completely unrecognizable from what it was fifty years ago. You can watch movies on iPods, download TV shows from the internet, and vote for the newest American Idol from your phone. And it doesn't stop there. Fifty years ago, you'd never hear a salty independent producer say, "I'm gonna put you in my LLC, kid." Today, you just might.
Risky and Independent
Independent producers still exist in Hollywood, but their numbers are far smaller.
Their work is both limited and risky. They must compete with integrated media giants that can bear risk by spreading costs over a number of products.
The independent producer develops and ultimately makes far fewer shows, spreading the economic risk over a smaller number of projects.
Even so, studios and independent producers are still intertwined. The studio buys a finished product from a producer.
These deals are often negotiated before a film completes, and payment is made on delivery. These types of agreements, sometimes called "negative pick up" agreements, are suitable for producers because they keep them in business and independent.
The independent company still bears the risk that a project will not be completed or incur serious financial loss. To reduce risk and enhance control, independent producers began to form LLCs for productions.
Producing an LLC
The LLC, or limited liability company, is an entity that essentially contains investor liability within the bounds of the LLC itself. Unlike a partnership, the investor in an LLC is liable only for the amount of their investment in that company.
So, if a hypothetical LLC were to go from being in the black to being far, far in the red, the individual investors are not personally liable for the LLC's debts.
For companies that operate as partnerships between founders, it is useful to form an LLC around an individual production to prevent any losses incurred from that production from impacting either the partnership as a whole or the individual partners' assets.
Critics may wonder, why not form a corporation around the production and limit liability that way? While it is true that a corporation offers similar protection for individual assets, LLCs have some other unique features that make them the preferred entity for individual productions.
Unlike corporations, LLCs are not subject to double taxation at both the shareholder and company level. Instead, LLCs are taxed as partnerships.
This gives more flexibility in how they allocate gains and losses, a critically important feature for entertainment companies whose gains and losses may vary wildly depending on the success of any given project at a particular moment in time.
LLCs offer an additional feature that makes them more flexible and more desirable for use in the entertainment industry: they are not subject to governance rules.
Because they are not hemmed in by legal requirements that dictate the manner and mode of governance and organization, an LLC may be run as the controlling parties desire, meaning that no board meetings or shareholder accountings are mandated.
This gives the company operating the LLC the ability to make quick decisions, which is highly desirable in a business where "time is money."
New Businesses, New Taxes
Of course, LLCs are not without certain drawbacks. Among the most notable is the recent California tax change that subjects LLCs to a hefty tax. Some guess this tax was created to exact more funds from Southern California's dominant industry: film. Whatever the reasons, LLCs are now more expensive to form and maintain than they have been in the past.
Yet, for many companies engaged in the often speculative business of film and television production, an LLC is still cheaper than the risk of financial ruin. LLCs protect company assets to make risky business decisions a little bit safer.