Nearly every celebrity, musician, artist, band, group, or other entertainment professional that you know has what is called a “loan out company,” by which their personal services are provided to the public at large.
A loan-out corporation is essentially a company that is formed for the purposes of employing the entertainer, whether it is an actor, actress, musician, artist, band, group, singer, or other entertainment professional.
Why Loan Out?
There are a few reasons why entertainers form loan-out companies, most of which have to do with taxes, income-planning, and intellectual property. For example:
- Reducing Tax Rate. Generally, having a loan out company will help entertainers who do not have consistent income (very high one year, maybe low the next year) spread out their tax obligations for high-income years. Being able to spread that income out over several years will result in an overall lower tax rate.
- Lower Taxes Overall. Because corporations are taxed lower than individuals, entertainers would generally pay less in taxes operating through a corporation than as a n individual, i.e., a sole proprietor.
- Pensions and 401(K)s. One of the greatest benefits of an entertainment loan-out company is the ability to funnel the entertainer’s income, tax-free, into certain plans that have very favorable tax treatment, such as pensions, 401(K) plans, or other similar profit sharing plans and trusts. With these types of tax-deferred accounts, the entertainer does not need to pay taxes on income until retirement and would even have an opportunity to obtain distributions of income, tax-free, in the case of a disability later in life. Even better, the money saved up in these tax-deferred accounts could be excluded from death taxes upon the death of the entertainer, leaving more for the entertainer’s family and heirs.
- Protecting Intellectual Property. In the event that bad financial or other circumstances fall upon the entertainer, the entertainer’s valuable intellectual property assets are preserved as property of the company.
How Loan Outs Work
In a typical loan-out entity, a musician would form a loan-out company, and when advances or royalties were paid by the musician’s record label, they would be paid to the company, not the musician. The company would then pay salary to the musician, as an employee, and pay payroll taxes and the employer’s share of FICA (Medicare/social security) for the musician. At the end of the year, the company would issue a W-2 tax return to the musician and the musician would file taxes as an employee. The loan-out company would pay the expenses incurred by the musician, such as agency or manager commissions, and legal or accounting fees, and could deduct business expenses such as office space, and equipment.
Types of Loan-Outs
Loan-out companies are like any other business entity. They can consist of C-Corporations, S-Corporations, and LLCs. Many entertainers prefer S-Corporations or LLCs rather than traditional C-Corporations because of the easier administration and management of those types of corporate entities.
The disadvantages of having loan-out companies are primarily related to the extra expense that will be required to set up and maintain the business entity, as well as accounting and legal services to reduce the risk of audit by the IRS. Because loan out companies can result in significant tax savings, they can be investigated more closely by the IRS. Corporations and LLCs can generally cost approximately $1,500 – $3,500 to start up, with various governmental and other maintenance fees payable over the course of the entity’s life. In California, for example, a franchise fee of $800 per year must be paid to the California secretary of state, which is waived for the first year for corporations, but due immediately for LLCs.
Maintaining a Loan Out Company
To ensure that the loan out company stays in existence, and in accordance with the legal requirements, entertainers will need to make sure that the corporate formalities are met, such as holding annual meetings, maintaining minutes of meetings, filing the necessary secretary of state annual filings, and paying taxes to state and federal taxing authorities. Further, if the loan out company employs any assistants, staff, or other employees, it will need to comply with state and federal labor laws.
► Getting Legal Help
If you are an entertainment professional seeking an entertainment attorney, contact Axis Legal Counsel. Our Entertainment Law Practice serves clients in multiple entertainment industries, including but not limited to music, television, film, arts, visual arts, fashion, literary, publishing, new media, social media, and numerous others. We assist entertainment businesses with contracts and transactions, intellectual property, labor/employment law, business financing, mergers and acquisitions, real estate, insurance, business succession planning, and general advice and counsel. . We have assisted clients with business matters involving their entertainment business companies, contracts and agreements, intellectual property and licensing matters, partnerships and ventures, endorsement agreements, contract negotiations, development, production, and distribution agreements, and numerous other similar deals and transactions in the entertainment industry. Contact us today at 213-403-0100 or email@example.com for a confidential consultation.
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I’m a Calif. CPA. My client, a CA resident , formed an S corp. She entertains in various places across the country. Can each state require the corp to file a corp income tax return? Is there any authority that would apply to states generally? Or do I have to know the law of each gig state? I believe that generally, a corp must be doing business, or have nexus, or have income sourced to a state before there is a filing requirement.