Welcome to Cinema Law, where you ask the questions of our resident team of legal experts and, each week, they’ll provide the answers to your production queries. Cinema Law is presented as general information only and is not meant to take the place of professional legal advice.

Q: I’ve heard that some moviemakers create an LLC for their movies. What’s an LLC, and does every production need one?

David Albert Pierce, Esq.: There are essentially four basic types of production entities: Sole Proprietorships, Partnerships, Limited Liability Companies and Corporations (which can either be the very useful S-Corp, which is an IRS designation for certain small companies, or the traditional, stodgy C-Corp). In the vast majority of situations, particularly for those productions located in California, the Limited Liability Company (LLC) will prove to be the best possible choice for your production. The California LLC structure is incredibly flexible and provides both the full favorable liability protection of a corporation and also the favorable tax benefits of a partnership.

An LLC is created by filing Articles Of Organization with the Secretary of State, and it provides a corporate shell for liability protection. In other words, you as producer cannot be individually named in a lawsuit (unless, of course, you personally committed some wrongful act). In addition, LLCs provide you with what is known as a pass-through partnership-like method of taxation. This essentially means the members of the LLC are taxed once actual profits distributed to them, as opposed to the double taxation to which C-Corps are exposed (wherein the corporation is taxed and then the shareholders are also taxed).

S-Corps also provide favorable tax treatment combined with liability protection. However, the S-Corp designation is bestowed upon a corporation only when the corporation meets very specific rules set forth by the IRS. One of the rules that often make S-Corps unavailable to film production entities is the rule that only one class of stock is permitted to exist in order to keep the S-Corp designation. And since the vast majority of production companies traditionally rely on at least two classes of stock—one class held by the producers and one class held by investors—S-Corps are simply not available for this purpose. S-Corps do, however, make the perfect choice for a loan-out company when the entire company consists of just one or two people whose services are loaned-out to others (this is assuming the other criteria for S-Corp status exist). Therefore, it is common for the producers of a picture to have an S-Corp that acts as the managing member of the overall production company, which is itself an LLC. Also, while an S-Corp can manage an LLC, an LLC can’t manage an S-Corp, nor can a S-Corp manage another S-Corp (just one more of those rules set forth by the IRS).

Here are a few more things to remember. While the general rule is that LLCs are the preferred vehicle to use, there are exceptions. Certain unique legal, tax and financing issues may dictate that an S-corp or C-Corp would serve as a better production entity for your specific needs. The decision as to which corporate entity you should use should be made in conjunction with a discussion with your legal representative and your tax accountant. Another important thing to remember is that there’s generally no value whatsoever to forming your LLC (or corporation) in Nevada or Delaware. The promises you hear on the radio about how you don’t have to pay tax if you incorporate in those states is simply misleading. Yes, you don’t have to pay tax in Nevada or Delaware. However, you still have to pay tax in California or New York or wherever your LLC is actually doing business. Think of it this way: If it’s really that easy to avoid a California tax just by organizing your company in Nevada, who in their right mind would ever organize their company in California, and why would California ever allow such a huge loophole?

Once an LLC is created, certain rules must be followed to preserve corporate formalities and to prevent creditors from “piercing the corporate veil.” Each LLC should have a written Operating Agreement, Organizational Minutes, Subscription Agreements, Annual Minutes and a bank account that is not commingled with any funds not related to the LLC. Failure to maintain these corporate formalities may result in you not having the full liability protection that you initially thought you would, which could come back to haunt you. Also, every LLC must have the words “Limited Liability Company” or the abbreviation “LLC” as the last words of the company name.

One other thing worth noting is that often producers mistakenly refer to LLCs as an LLP, or Limited Liability Partnership. An LLP is simply an LLC for certain occupations which require licensing, such as attorneys, engineers or CPAs. Only these special classifications of businesses are permitted to have the LLP status. In a similar vein, producers sometimes ask to have “LP” (Limited Partnership) in the company name. Limited Partnerships were once useful tax shelters that operated like a modern-day LLC in many ways. Nowadays, however, the LP entity is essentially extinct, as the LLC provides a better method of achieving the same results.

OK, that’s the end of my lesson in corporate formation, liability protection and tax. Now you can get back to making your cinematic masterpiece! Good luck.

David Albert Pierce is managing member of Pierce Law Group LLP, a boutique entertainment law firm with an emphasis on providing employment law counseling for independent film and television production companies. Pierce has served as counsel for “Amazing Race,” “Oprah’s Big Give” and numerous projects for View Films (producers of the long-running “Taxicab Confessions” and the new CBS drama “The Defenders”). Pierce has also provided entertainment related employment law advice to Morgan Creek Productions, Starz!/Encore, Cartoon Network, Film Roman, Lions Gate Films and Lions Gate Televisions (including such critically acclaimed shows as “Weeds” “Mad Men” and “Nurse Jackie”).