By: Steve Masur and Danika Johnson
Artists, performers, celebrities, and freelancers in the know use loan-out companies. A loan-out company is a personal LLC or corporation formed to do business on your behalf. Instead of signing agreements yourself and risking getting sued personally, the loan-out company signs, and “loans out” your services.
As the saying goes, if you want your life to be a certain way, live as if it were. Just like an animal developing plumage to make itself look more intimidating, a loan-out company can make you look more professional, better organized, and more important. It is a subtle indication that you have a lot going on, that you are probably well represented by lawyers and accountants, and that you want real money for your services. In other words, that you’re one of the real players of what you do, and that you probably won’t accept being low-balled on your fees. Also, for many well-paying gigs, the hiring companies require that you have your own company for their own liability protection, and so they can pay you as an independent contractor instead of as an employee. So for certain opportunities, you need the loan-out company to even be considered for the role.
A loan-out company also makes it contractually easier for you to delegate work to third parties. You can engage agents, managers, lawyers, accountants, roadies, and social media managers to get more done more quickly in order to build your creative business faster. Engaging these people allows you to focus on your core product; you and your creative output. A loan-out company allows you to take advantage of itemized tax deductions, protects your personal assets against third-party lawsuits as well as lawsuits brought against you by your own employees or agents. Finally, having a loan-out company allows you or your agents to sue others who owe you money without fear that you might be sued back, or brought in personally through counterclaims. A loan-out company can pay you a regular salary exempt from self-employment tax, which allows you to pay a regular rent or mortgage and your living expenses, and write your business expenses off against your total income, while the rest of your money is wisely invested.
How it Works
Since the loan-out company enters into any contracts for income or services on your behalf, the loan-out company receives payment and/or gives payment to those that are due. If an issue arises with any third party, the loan-out company’s assets are on the line, but your personal assets are protected from liability. Still, it is important to look out for inducement agreements. These provisions, strategically placed in contracts for your services, state that if anything happens to the loan-out company, you must still provide the services agreed in the contract. But if you have enough leverage under the circumstances, you can negotiate around these provisions.
All good things come with responsibilities. There are costs required, sometimes substantial, in order to set up a well-organized loan-out company, and annual costs thereafter to keep it in good standing with the state of incorporation. You also have to file tax returns for it every year, so you might find yourself getting an accountant to do it for you. As a result, it makes sense to wait until your career is generating good money before setting up a loan-out company. Also, after you have delegated as many of the ancillary roles for your career as you can afford, it is important for you to demand good reporting, and to maintain oversight and ultimate control over what the loan-out company does. It is literally your career on the line, and almost everyone has heard the stories of artists who lost control of the money, and their career. But if you maintain good oversight of your agents and employees, and you are not afraid to let go of dishonest, controlling, or unreliable people, this will not happen to you.
Other Things to Keep in Mind
Recently, the New York District Court decided that loan-out companies are not authors of an artists’ work and therefore cannot exercise termination rights in accordance with Section 203 of the U.S. Copyright Act. Under Section 203, only the actual artist may terminate the rights that the artist themselves granted. Therefore, a loan-out company must take caution when determining which legal entity, whether the artist or the loan-out company, will be signing agreements granting rights to third parties.
You should also consider purchasing worker’s compensation insurance and medical coverage. If something happens to you, the loan-out corporation needs to be able to cover the costs, not only of your injuries but also the costs related to unwinding any gigs to which the loan-out company contractually committed. The loan-out company must also play by the rules of any other company and pay quarterly payroll taxes, and other costs related to any employees. As a result, if you form one, you should seek assistance from a good tax advisor. The more successful you are, the more likely you will be audited. If the IRS believes that the loan-out company is a sham set up solely to avoid taxes, it may attempt to reallocate income between owners and those controlling the corporation, charge the higher personal tax rate, and hit you with fees and penalties related to years of nonpayment. Luckily, you can engage a PEO (professional employer organization) like TriNet, ADP, or Paychex to manage all of this for you.
With proper preparation and continued diligence, a loan-out company can provide you with liability protection, peace of mind, and substantial tax write-offs, as well as credibility that will strike directly to your bottom line. If you are interested in setting one up, let us know, and we’ll help you get it done!