Effectively, that means that loan out companies in the TV and Film industry will need be taxed as a corporation (C or S). At Wrapbook, we pride ourselves on providing outstanding free resources to producers and their crews, but this post is for informational purposes only as of the date above. The content on our website is not intended to provide and should not be relied on for legal, accounting, or tax advice. You should consult with your own legal, accounting, or tax advisors to determine how this general information may apply to your specific circumstances. Always set up a separate bank account to get the most tax savings from your loan-out company by charging all your expenses to the account.
These considerations are crucial to establishing a loan-out company that gives you the most savings. You can find law firms through friends or websites like LegalZoom. You’ll first need to file articles of incorporation with the state government. If you’re establishing an LLC, this document will instead be known as articles of organization.
How Loan Out Companies WorkWhen you become a freelancer in the entertainment industry, you have the option to set up your own loan out company. This will require some paperwork and filing with your state government as well as obtaining licenses and permits if necessary. Once your loan out company is registered with a state agency, you can begin providing services to production companies or studios on behalf of your business entity instead of yourself as an individual freelancer.
Put plainly, using a loan out corporation allows entertainment professionals to protect their personal assets. A loan-out company or loan-out corporation is a legal business entity in the United States established for “loaning out” the services of its creator to third parties. When an individual creates a loan-out corporation, they become its owner and sole employee. Anyone interested in determining the amount of tax savings should seek out the assistance of a tax advisor.
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So, when a production company hires talent through their loan out corporation, they are in contract with the corporation, not the talent nonrecurring items definition themselves. The entertainment professional becomes an employee of the company and the company “loans out” the services of the professional. Generally, they include preparing your corporation’s operating documents (a corporate records book, corporate bylaws, operating agreements, etc.).
Furthermore, AB 5, by setting up rules applicable when one employer loans an employee to another employer, specifically contemplates that loan-outs will continue. Our collective bargaining agreements (CBAs) expressly allow members to use loan-outs. AB 5 is not directed at our industry, and we do not believe it will trigger a change to industry practices. As an entertainment industry professional, you may have heard the term “loan-out company” thrown around in discussions about contracts and payroll. Perhaps you even reference “loan out companies” in your contracts with workers.
Essentially, this exemption provides that a business providing a service to another business may properly fall under an independent contractor classification if it meets certain criteria. Generally, the business must be providing the service directly to the business and not to the other business’s clients. One example of a business got tips better report them relationship in the entertainment industry that may fall into this exemption (if certain criteria are met) could be craft services (for a production). Misclassifying workers can have serious, serious financial consequences (so serious, we wrote it twice!), especially in California. For example, misclassification can subject a company to liability for failure to pay wages (including overtime), missed meal and rest break penalties, waiting time penalties (up to 1 month of pay), and wage statement penalties.
How do you set up a loan-out company?
Matt Brown Media offers business and legal affairs services to businesses and individuals in the media and entertainment spaces. Matt Brown Media can help you form a loan out company and stay in compliance to obtain the benefits of one. By electing to have the loan-out corporation taxed as an S corporation, the freelancer can get some significant payroll tax savings. For productions in California, you may have heard of there being a business-to-business exemption under AB5 (the legislation that changed California’s worker classification analysis).
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Because the loan-out is a separate legal entity from its creator, the creator is not legally liable for any claims against the company. For instance, if the company is sued, any assets listed as the company’s will be at stake. As a freelancer, you could potentially get a lower tax rate while protecting your personal assets with something called a loan-out company. By setting up a loan-out company, you could enjoy these benefits while using the savings to offset setup costs. An effective strategy for self employed individuals to reduce their effective tax rate is forming a Loan Out Company. We discuss what a Loan Out Company is, the business benefits, and how to properly set one up.
One of the major benefits to having a loan out corporation is the ability to more closely manage cash flow. An individual freelancer who works on short-term gigs and makes at least $75K per year is the ideal candidate for this type of corporation. That question can only be answered by carefully analyzing your unique circumstances. Tax and legal professionals can help you determine how to run a loan-out company tailored to your unique needs. When you add legal and administrative fees and the risk of double taxation, a loan-out company is a liability for anyone making less than $75,000.
- At a glance, utilizing a loan-out company might seem complicated.
- Generally, entertainment professionals without a loan out corporation are paid W-2 wages.
- Through a Loan Out Company, the individual can reduce their effective tax rate by avoiding self-employment taxes (including Medicare and Social Security tax).
- That question can only be answered by carefully analyzing your unique circumstances.
Loan-out corporations are frequently encountered in the professional sports, music, and entertainment industries. The reason for this is that the lifeblood of these fields stems from labor and services performed as contracted individuals. The corporate body is engaged by external third parties to fulfill services, rather than the individual directly.
Additionally, if the employee is forced to litigate these claims (and prevails), they may be entitled to attorney’s fees and costs. Even a single-day shoot that suffers misclassification issues can result in the exposure of liability to a worker for a full 30 days worth of wages, plus penalties (and yes, that is true even if the shoot was just 1 day). It’s important to note that a “loan out” corporation isn’t a specific type of legal entity. “Loan out” is just a colloquial term used to describe an entertainment professional’s use of a business entity. Rather than being paid directly as an employee, entertainment professionals use a loan out corporation to conduct all of their business activities.
For example, a registered nurse who uses Care.com to find patients for her elder care service could form a Loan Out Company to contract with patients directly. Submit your question below so we can help other entertainment industry professionals by contributing to the knowledge base. Note that some states (approximately 16 and counting) impose taxes on loan-out companies (depending on circumstances), and each state has its own set of requirements for registration and reporting. There is no limit on business deductions for corporations assuming that the expenses are ordinary, necessary, and not specifically disallowed by the Internal Revenue Code.