Creative professionals often render their services through a distinct legal entity known as a “loan-out company”, because it loans-out the entertainer’s services.  The use of a loan-out company can offer many benefits, including limiting personal liability, minimizing taxes and maximizing available benefits.  The flip-side, however, is the administrative burdens and costs of properly maintaining the loan-out structure.  Accordingly, a careful weighing of the potential benefits and burdens should be done before deciding whether to use a loan-out company.

The Loan-Out Structure

A loan-out company can be structured in any number of ways, including as a “C Corporation”, an “S Corporation” or a limited liability company (“LLC”).  Although the formalities of maintaining an LLC are generally less burdensome than a corporation, some production companies may insist on withholding employer taxes on payments to LLCs, making a corporation the more practical form to realize the benefits of the loan-out structure.  The form of entity chosen, however, will ultimately depend on the entertainer’s particular circumstances.

Regardless of the form of the loan-out company, the entertainer will enter into an agreement with the company establishing its right to loan-out the entertainer’s services.  The performance contract will now be between the third-party and the loan-out company instead of directly with the entertainer.  The third-party production company will also typically require the entertainer to promise to perform the services being provided by the loan-out company through what is called an inducement agreement.

The Potential Benefits of a Loan-Out Company

One potential benefit of the loan-out structure is the limitation of liability to corporate assets rather than the entertainer’s personal assets, as a result of the corporation being a separate legal entity.  However, it is important to adhere to corporate formalities such as holding regular stockholder and board meetings, keeping good corporate records and separating personal from corporate finances, among others.  A failure to do so could result in a piercing of the corporate veil allowing someone to reach the entertainer’s personal assets.

Use of a loan-out company may also help minimize an entertainer’s taxes through the deferral of income and maximization of deductions.  The entertainer may have greater flexibility in retirement plans set up through the loan-out company itself rather than limited options offered through employers or unions.  The loan-out company’s expenses may also be fully deductible as opposed to those of a regular employee which have historically only been deductible to the extent they exceed 2% of the employee’s adjusted gross income.[1]  Moreover, running expenses through a corporate entity may help reduce the risk of an audit where the entertainer would otherwise be taking unusually large deductions for an individual.

Careful consideration should be paid to whether the use of a loan-out company would run afoul of Section 269A of the Internal Revenue Code (the “Code”).  That provision of the Code would allow the Internal Revenue Service (“IRS”) to disregard the loan-out company if substantially all of the services performed are for one entity and the principle purpose of the company is to avoid federal taxes by reducing income or securing a deduction which would otherwise not be available.  See 26 U.S.C.S. §269A.

The Burdens of the Loan-Out Structure

Although there can be many benefits to the loan-out structure, they need to be carefully weighed against the burdens.  Some burdens to consider, include, but are not limited to:

·       Maintaining corporate formalities in order to avoid a piercing of the veil.  

·       Maintaining the company’s financial records and ensuring proper tax filings are made, including, for example, the remittance of withholding taxes on the compensation paid to the entertainer by the loan-out company. 

·       Ensuring the loan-out company is compliant with other business filing obligations such as being properly registered in the various states in which it is doing business.

·       Maintaining appropriate insurance coverage, including, but not limited to, workers compensation insurance as required by law.

·       Hiring professionals such as lawyers and accountants to ensure proper compliance with the loan-out company’s obligations, which may mean initial and ongoing professional fees.

The burdens of running a loan-out company are not insubstantial.  Therefore, an entertainer will want to carefully evaluate their current situation to determine whether it can be expected to continue into the future and whether the benefits of using a loan-out company will outweigh its burdens.

[1] Keep in mind Congress is currently considering a tax reform package and we will not know what impact it may have until it becomes law.

ATTORNEY ADVERTISING. This document is provided by P. Taylor Legal, PLLC for information purposes only and is not intended and should not be construed as legal advice.

Philip Taylor