I found this discussion on transactional entertainment law to be quite interesting, yet a little overwhelming with information, as did other audience members who stated this during the Q&A. Both Fernando Ramirez and *Innes Smolansky illustrated the legal concepts quite well, but I would recommend you do further research when seeking legal advice, other than what you read just here. These are only my notes and interpretations of what I heard during the discussion, and not a complete transcript. I welcome further insights and elaborations from both Fernando and Innes, and of course if you also attended this discussion, please post any notes you may have taken in the comments section.
* Since I posted my notes this afternoon, Innes emailed me with some revisions and corrections that make my notes abundantly clearer. What you read below includes her revisions. Thanks so much, Innes!
Notes from The Discussion:
Fernando starts the discussion by asking everyone in the audience if they have ever dealt with attorneys or entertainment attorneys. Most everyone raises their hands. Fernando, who’s been practicing transactional entertainment law for the past ten years, says he gets a kick out of people who come to him and say they have a signed document/agreement, but couldn’t afford an attorney. It’s difficult for people to comprehend that a lawyer bills by the hour. It’s important for everyone to do their research on lawyers before they select one. Often, an experienced producer may know more about transactional matters than most attorneys who don’t practice transactional entertainment law. Even within entertainment law, there are specialties such as book, theater, music, film, and so on.
Fernando then asks everyone, “who owns a production company?” Again, most everyone raises their hands. He says that when someone wants to contact him, he tries to get a sense of what your issues are and also who referred you. He can tell when people don’t do their research. It’s important for first time filmmakers to get references. If you are looking to form a production company, he will ask you what type? An LLC? An S-Corp? This is where you initially will need to consult with an attorney. You can always form a corporation on your own, but preferably, you’ll want to pay an attorney. There are a series of services for forming your own such as We the People, Blumberg and Legalzoom.com. He cringes a little at these services. If you look at their literature, they have disclaimers that tell you this is not a substitution for competent legal advice.
Fernando then offers a roadmap of the fees and advantages of an LLC. Setting up a corporation costs about $170 paid to Albany, if in New York State, plus between $60-$80 for a corporate kit. Then you would apply for your EIN number on the IRS website. You will then get your certificate to open up a bank account. An LLC has the advantages of a sub-chapter S-Corp without the disadvantages of paying corporate taxes and income taxes. The disadvantage is that there is a minimum franchise tax of $700 expected to be paid every year, no matter how much you make. In addition, every project or film you create, should be its own company. It becomes insulated this way.
Joining the discussion a few minutes late, Innes arrives after being stuck in traffic. She picks up the conversation by saying that if you finance a film with active investors, as opposed to passive investors, then forming an LLC is a better choice for tax and legal reasons. LLCs are very flexible. They are key in the independent film world, but there are some advantages to S-Corps.
Innes says to think of the production process in two steps. First, you set up a company that develops projects (can be either an LLC or an S-Corp), and second, each film it will produce is its own separate company, which with very few exceptions is most always an LLC.
If you also use your development company to loan your services as producers, you may be better off with an S-corp. If you work for a large established company, then big companies prefer to pay S-Corps over single member LLCs.
Fernando interjects by saying he rarely comes across S-Corps. He brings up the relationship between a parent company versus a holding company, but Innes says “there is no holding company in the scenario of development company and film specific LLC” They come to somewhat of a disagreement here, which I don’t fully grasp the nature of, but Innes goes on to say the reason you set up LLCs or S-corps in the first place is because you never want to be personally liable. You also don’t want the development company to carry any liability. That is why you want to create a separate company for each film and have that company be liable for any problems.
Fernando says that setting up an LLC can be cost-prohibitive for some people. The expense is pretty unique in New York State because of publishing. You pay Albany approximately $235 [which is a different amount stated a few paragraphs above as $170. Not sure if this is because it’s a different document being filed or what]. Then after making that payment, you still are required to publish a notice in your local newspaper. An attorney doesn’t determine the publishing requirement, the county clerk where your business operates does. You must publish an ad in the paper for several weeks.Once you have set up your LLC, you go through the passive and active investor process, Fernando says.
Innes says: Laws protect investors from losing their money. With private investors, there’s usually only a limited group of people. If investors are active, they can be considered your co-producers. Fernando elaborates that active investors can have creative and financial control and don’t need as much protection, whereas passive investors do. Innes adds, the logic is almost common sense. Producers have to give investors a huge amount of information up front so they know what they are getting involved in. A prospectus document for any company doing an offering is a similar thing. Fernando says that even with active investors, there’s still a sizable amount of disclosure. Innes says when approaching an active investor, someone who would not be a film producer, showing a business plan is often a good idea.
Fernando mentions an offering memorandum. There is a discussion about legal fees and Innes says there is no way to do a correct private placement memorandum overnight. It is a very important and complicated document and it must be done right. If you are raising very little budget most likely, the SEC is not going to read your packet. They just file it, but this doesn’t mean you won’t have a really disgruntled investor who may sue you for fraud if you did not disclose all the relevant information. You have to be honest with your investors. Fernando says to give as much disclosure as you can.
For documentary production, Fernando says you have the possibility of setting up a not-for-profit (NFP) organization or getting fiscal sponsorship. This takes a very long time to set up and is very competitive. The good thing about fiscal sponsorship though is, it’s a grant. Innes adds that if your project is a documentary, that’s the most common way to finance your film. Whomever gives you the money can take a deduction. Fernando adds one thing to be mindful about is you can’t go to just any institution. You can’t take money from an institution that doesn’t have a purpose and use that money that doesn’t align with the company’s stated purpose. Innes doesn’t recommend forming an NFP for a single film, but you can still apply for fiscal sponsorship and use the fiscal sponsor as a conduit for the tax deductible contributions. The donor will get the tax deduction, but you could still have a profit on the film and keep it.
In referring back to the IFP Industry Connect’s theme of the discussion being “How and When To Get A Entertainment Lawyer,” Innes mentions that she and Fernando are there to help you see the road from A to Z. Budget your resources very carefully. Fernando suggests to read a lot of literature on front-money agreements, allowing yourself to make an informed decision.
Notes from the Audience Q&A
Q: What structure should documentary filmmakers follow who have more than one film?
(FR) Set up separate entities.
(IS) Having separate companies for each project protects against liability.
Q: Why do private offerings take so long? What’s expected from the client?
(IS) They take a fairly long time to draft because Disclosure of all relevant information and not withholding anything is expected. Under no circumstances, should you mislead or defraud the investor. A correctly placed private placement is very film specific. There’s a way for clients to help draft it faster and make it cheaper for them if the client writes much of it him or herself. Give very coherent bios, screenplay summary, festival strategy, etc. You could also have a front-money agreement drafted inexpensively, which is only a few pages. This goes to a limited number of investors. It tells them what you’re planning on producing and helps convince them it’s a good idea to invest.
(FR) Fernando says he once met a resourceful filmmaker who said she had her lawyer handle her first project, but she became so well-informed with the process that she does most of it herself. But he still recommends you consult with an attorney. A business plan is good to test the waters.
Q: Do you recommend and readings or resources?
(FR) For educational purposes, read The Biz and Clearance & Copyright by Michael Donaldson.(IS) Read Business Plans for Independents by Louise Levinson and Morrie Warshawski’s books for documentary filmmakers.
Labels: Fernando Ramirez, IFP, Innes Smolansky, transactional entertainment law