Just a quick note that this is being written with California companies in mind. However, if you plan on opening a company outside of California, the principals remain the same. Use this as a framework to get you started. You should also know ahead of time that it takes time and repetition to really understand the process. When I first started learning this, it felt very overwhelming, but with time and repetition, it slowly started to sink in, and I’m still constantly learning more about the process. Consider this just an introductory guide, to give you a sense of the process. Trust me, you’ll feel more comfortable with this as you spend more time with it.
Opening an LLC
You may have heard or seen the term “SPE” or “Sole Purpose Entity”, which is essentially an entity (company) that is created for the sole purpose of owning, in this case, your feature film. Usually it takes the form of an LLC, and if you want to better understand the differences between an LLC and a Corporation, this is a great article. I also highly recommend reading this library of short articles on LLCs (and if you really want to dive deep into the comparison, this library of short articles on a Corporation.)
The whole reason to start a Limited Liability Company is to, well, limit liability. Essentially the LLC will own and make all agreements with all parties (including you as the filmmaker) in making your film. That way if something goes wrong, you are not liable, but rather the LLC is. There are exceptions of course, and that’s why I highly recommend reading the articles mentioned above. This LLC will also (hopefully) be the one to take in the profits and distribute those according to your profit participation (which is all completely negotiable). This means that once your LLC is created, you are going to live with it for as long as the film is making money (which can be many, many years), so make sure you are ready for that responsibility at the time of creation. Don’t just open an LLC for the fun of it (because the paperwork is really not all that fun – I can promise you that).
It is however very exciting, as tedious as some of the paperwork may sometimes be, to officially own your entity which is making your movie! It marks the first official step towards turning your script into a film business. So what about services and agreements made before you created your LLC? For example the optioning of a script? You can have official agreements in place as an individual with other individuals or companies, and that’s totally fine, as long as once your SPE is formed, you assign all agreement over to the SPE or have the SPE create new agreements with all parties involved/necessary for owning and creating your feature film.
The Members and Investors
You do need to understand that there are different variations of LLCs in terms of its ownership, and you can also set up your investors to either be members (owners) of the LLC or not. Let’s start with a quick guide to ownership. I want to keep this to a quick introductory guide, so I’ll try not to go too deep into the exceptions and side-notes, and refer to articles and books for more information.
If you open an LLC, to which you are the sole owner, then the IRS considers it a “disregarded entity” and come time for Tax Returns you will only fill in ONE Tax Return (your personal) and attached to that you will report your accounting/taxes for your SPE. This doesn’t make your SPE any less official, but you won’t have to file separate taxes for it. There are exceptions to this, and you can learn more about that here.
If you have multiple owners of the LLC, say multiple producers, then you will have to file a separate Tax Return for the SPE and there are different ways to do this. All you need to know for now is that these filings exist. When the time comes, you should ask an accountant about this, and they should be able to handle this for you for a reasonable fee. It sounds more complicated than it actually is.
Lastly, you need to remember that an investor in your film, CAN be an owner of your LLC, but not necessarily. It all depends on how you want to structure the deal. You can structure it in a way where the member gets a percentage or stock in your LLC in return for their investment. Alternatively you can also structure the deal where they do not get a percentage or stock in your LLC, but they own the right to certain benefits such as recoupment of their investment plus a premium plus a part of the net profit participation. But this is something that you have to discuss with an entertainment attorney, and has to be carefully looked at by a professional on a case by case basis.
What Taxes, Fees & Licenses to budget for and expect
There are going to be fees involved with creating an LLC. These fees can range from about $800 – $1,500. That’s the set up fee. But remember you will also have to pay Federal and State Taxes. In California, you’ll have to pay the Franchise Tax Board $800 within the first 4 months of creating the LLC. You will also have to find out if your County or City requires you to get a Business License. The City of Los Angeles requires you get a Business License which should cost you about $125.
Then remember your SPE is going to be responsible for annual taxes. It’s wise to budget and put aside some funds for the first 2 years of accounting (after which, hopefully profits will start to come in and pay for that.) Remember you’ll have accounting fees for an accountant to actually prepare the Tax Return, the Franchise Tax Board fee of $800 will be due every year, as well as potentially your County or City Business License Renewal fee. This is why it’s so important that you not open an LLC until you’re absolutely ready to make your film.
You’ll also have to apply for an EIN (Entity Identification Number) which is like a Social Security Number for your business. The good news here is that you don’t have to pay for that, but you will need it to run your business. By the end of the creation of your LLC you should have (at the very least) the following paperwork in order:
- Operating Agreement
- Articles of Incorporation
- County/City Business License (if applicable)
With these documents you can go into any bank and officially open up a bank account for your SPE!
Hopefully the next step is you make your film, and make some profit off it! If you want to learn more about this, I highly recommend the book The Pocket Lawyer for Filmmakers. I go back to this book ALL THE TIME. It’s written by an entertainment attorney and does a great job of further explaining the process of opening an SPE for your film as well as all the legal stuff you need to consider and look out for.
When you’re ready to open your LLC, you can look up an attorney or a business manager (I recommend you start by asking your colleagues for recommendations), or you may want to consider using an online service like LegalZoom. I’ve done both in different scenarios. Make sure to read or ask about all the fees you should expect, ask lots of questions (that’s your prerogative — and it took me some time to get used to the process by lots of repetition), and make sure to budget accordingly! Lastly, DON’T open your LLC until you are absolutely greenlit and ready to make your movie.