“Loan-Out Company.” What is that?

Have you ever wondered how entities such as corporations and limited liability companies are used in the entertainment and creative industries? Have you heard the term “loan-out company” and wondered what that is?

A so-called “loan-out company” is a business entity commonly formed by actors, musicians, directors, producers, writers, photographers, and others in the entertainment and broader creative industries through which they provide their personal services to a third party, like a production company, record label, publication, or other purchaser. A loan-out company, which can be either a limited liability company or corporation, “employs” the individual who formed the entity. That loan-out company then contracts with third parties and “lends out” the services of its employee. The loan-out company allows the individual creative to provide his/her/their services to third parties as an employee of the loan-out entity, rather than providing them directly. If using a loan-out company, it is typical for third parties like studios and record labels to require the individual service provider to execute an “inducement letter” by which it is confirmed that the individual creative will be personally providing the services upon the terms agreed upon by the loan-out entity. This is sort of like a personal guarantee.

There are numerous benefits to using a loan-out company to provide creative services, including:

• The loan-out LLC or corporation provides a liability shield which, to the extent possible, shields the individual creator’s assets from the creditors of the loan-out company.
• There are tax advantages available to corporations and LLCs that are not available to self-employed individuals, such as employee benefits plans, which can sometimes be written off.
• The loan-out entity can engage and pay necessary professionals – such as accountants, lawyers, acting and voice coaches, agents, managers, and much more – and more easily deduct these business expenses from gross revenues.
• In many cases, use of an entity results in a lower tax rate than the rate applicable to an individual earning the same amount.

Of course, there are obligations that come with the establishment and maintenance of a loan-out company, including attorneys’ fees, filing fees, annual payments to the state where the entity is formed and, potentially, other states where business is conducted, and periodic mandatory filings to maintain the good standing of the loan-out entity. There also may be issues with copyright recapture later on if the entity owns a copyright in an artistic work, rather than the individual author of that work.  This issue is still working its way through the courts and Congress and is beyond the scope of this article.

Use of a loan-out company requires thought and planning, typically involving both your attorney and your CPA. Here at Crown®, LLP, in conjunction with a tax professional, we help our clients involved in all corners of the entertainment and creative industries make the determination of whether use of a loan-out company would be advantageous. If so, we will work with you to form your loan-out entity, handle the necessary filings to maintain that entity, and work with your CPA or other tax professional to make sure you are proceeding properly and getting the tax advantages available.

If you have questions about loan-out entities and inducement letters, we can help. Or, if you have questions about corporations or limited liability companies in general, we have answers.

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