https://www.tormey.org/business2.htm
LLC’s, Corporations, And
Other Business Structures - Part II:
Written By New York Entertainment Attorney
And LLC Counsel
John J. Tormey III, Esq.
This article is not intended to constitute, and does not constitute, legal advice with respect to your particular situation and fact pattern. Do secure counsel promptly, if you see any legal issue looming on the horizon which may affect your career or your rights. What applies in one context, may not apply to the next one. Make sure that you seek individualized legal advice as to any important matter pertaining to your career or your rights generally.
Part I of this article discussed the process of selecting
a new name for a business, typically a limited liability company (LLC)
or a corporation in this day and age. Many people choose to incorporate
or form an LLC, so as to minimize their personal liability for the debts,
liabilities, and obligations of their business. There is cost to forming
an entity, but the cost is often worth it. What follows is a brief discussion
of “personal liability”, and the types of entities that
may be available. These types of issues regarding corporations and limited
liability companies (LLC’s) are often brought to music
lawyers, film lawyers, television
lawyers,publishing lawyers,
and entertainment attorneys
such as myself in the
context of new entertainment venture start-up companies and otherwise,
but are in fact universal concerns and themes
across manifold sectors and industries besides entertainment.
2. Choosing an Entity.
A full description of all the differences between an S-corporation (S-corp),
a C-corporation (C-corp), and a limited liability company (LLC) would
be beyond the scope of this article. Besides, the distinctions are often
altered - some would say “blurred” - by changes in the Internal
Revenue Code and state laws. Even by the time you read this article,
further changes to relevant tax laws and state laws may be made, further
affecting your entity
choice as between a limited
liability company (LLC), a corporation, or other available form
of entity such as a partnership or trust. The bottom line is that a
choice of entity should be made upon current information only, with
the assistance of a lawyer and an accountant. To do it any other way
is to risk making a bad choice that one will later regret, especially
when the first or successive tax returns relating to the LLC or corporation
are filed. Though in this day and age an entertainment attorney will
typically be asked to form and file a limited liability company (LLC)
rather than an alternate form of entity in the context of a new film,
music, television, publishing, or other
media or entertainment business start-up, the choice of entity should
still be carefully examined by the entertainment attorney and the business-owner
at the outset – just as it should be carefully examined in any
other sector or industry.
The distinctions between an S-corp, C-corp, and limited liability company
(LLC) make sense when taken in the historical perspective. Look at them
as the product of a kind of Darwinian evolution. In that vein, the S-corp
and C-corp may someday become but extinct historical artifacts, while
the LLC could become the only entity “fittest” to survive.
The LLC may be the best choice of entity - if , and if one
is not otherwise precluded from forming it by virtue of one’s
own tax profile or one’s home state’s current restrictions
on LLC’s.
At some point in history it was realized that persons involved in businesses
could be thereby putting their own personal assets at risk as a result.
That principle still applies, by the way. If one runs an unincorporated
or non-LLC business out of one’s house, that business owner may
risk later losing that same house, not to mention cars, bank accounts,
and other assets, to the debts, liabilities and obligations of one’s
business. This is what “personal liability” is all about.
A business owner wants to avoid personal liability, at all costs. The
owner wants to shield his or her assets - like a house, cars, and personal
bank accounts - from the risks engendered by the business. For these
reasons, understandable and common to all humanity, the concept of a
corporation was first formulated, many years ago. Copyright,
trademark, and other
rights-deals in the context of
film, music, television,
publishing, and media
particularly, tend to be liability-evocative, and so it is not uncommon
for an entertainment
attorney to first focus on the structure of the business vehicle
through which the proposed deal is intended to run, before looking at
the deal itself.
The traditional and old-fashioned form of corporation in the U.S. still
exists as of this writing - in the form of the C-corporation, named
after a “Subchapter-C” in the Internal Revenue Code. When
properly filed and maintained, the C-corp shields the business-owner/principal
from personal liability. For example, if there is US$10,000 in the C-corp’s
corporate bank account, then, in theory, only that US$10,000 amount
can be used to satisfy a civil (court) judgment against the corporation
- even if the President and sole shareholder of the corporation has
an additional $50,000 in his/her personal bank account. A “wall”,
“shield”, or “veil” is put up between the two
sets of assets.
But the C-corp posed historical problems, principally that of so-called
“double taxation”. Those C-corp owners filed corporate tax
returns as well as individual tax returns. The unsuspecting were thereupon
often disheartened to find out that they were subjected to an extra
tax hit. The C-corp would be taxed on corporate earnings. In addition,
the shareholders could also be taxed personally on monies withdrawn
from the corporation by way of dividends. The net effect wasn’t
always necessarily a 100% increase in otherwise-prevailing tax (as the
somewhat-misleading phrase “double taxation” might otherwise
suggest). But, on the other hand, the monies generated by the C-corp
were required to filter through two “layers” of taxation
as opposed to one.
In this regard, a number of business owners, including some in the entertainment
business, realized that they would have oddly been better off from a
tax perspective if not incorporated - a bizarre result if there ever
was one. Why should the tax code and state corporation law encourage
you to take unacceptable personal risk, after all? Some persons thereupon
decided to simply not incorporate (or “un-incorporate”,
dissolving a pre-existing corporation), and thereupon take the oft-significant
risk of individual liability so as to minimize taxes. If continued,
one would expect the rate of commercial litigations and personal bankruptcies
to rise as result, an event which in no way would be in the public interest.
Other persons instead opted out of corporate and business ownership
entirely. As an entertainment attorney practicing in New York, I still
encounter many companies who have yet to incorporate or form a limited
liability company (LLC) – they are typically either sole proprietorships
or de facto partnerships, the risks of which their principals are still
assuming personal liability whether aware of it or not. The risks are
exacerbated if the business hires employees
or even independent
contractors.
The next installment of this article will address how society responded
to the growing dissatisfaction with the C-corp - namely, the creation
of the S-corp and the limited liability company (LLC) thereafter.
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My entertainment law practice includes incorporations and the formation of limited liability companies (LLC’s), as well as employment work and all forms of contractual matters. If you have questions about legal issues which affect your career, and require representation, please contact me: