Introduction

This chapter presents the basic company structures and their interrelationships producers use to establish their brand, protect their assets, govern and direct the development and production of their projects.

The Power of Company Structure

The purpose of company structures is to:

• Provide each business entity with distinct legal identity recognized by governmental bodies (city, county, state, province, federal, etc.), tax authorities, other businesses, and individuals.
• Establish independent, tangible, tradable business presences with the capacity to increase in value.
• Deliver company owners increased business/trading capacities, funding/financing capacities, legal protection, and optimized taxation.

For instance, especially as directors, actors, and screenwriters increase their prominence (it only takes one successful project) they will find themselves in positions to partially package projects that come to them, possibly leading to their production and distribution getting “set up.” If they do these activities from their own production company, they are significantly deal-advantaged, compared with doing them as an individual talent. Though their capacity to perform this work does not change, just by nature of them doing it as a production company, rather than as an individual, their capacity to negotiate more favorable terms significantly increases.

If a talent wants to co-produce a picture with a production company, a talent/company deal naturally transpires. If a production company wants to co-produce with another production company, a company-to-company co-production deal transpires. The co-production entity thereafter negotiates a deal with this and other talent. The deal point array and relative benefits of the company-to-company transaction are potentially much more beneficial to the talent than is the talent/company relationship.

The Producer’s Operations and Companies

Producers achieve maximum structure benefits by structuring, managing and having separate accounting for three levels of operations:

1. their production holding company
2. multiple project development operations, and
3. individual project producing companies. The operating team will be either the same, or largely so for all these entities.

Having multiple operations provides the producer operating clarity, separate accounting for all profit participants on each project, and critical picture-to-picture legal protection.

Figure 11.1 shows how these three, the production, development, and single project, companies work together. Again, though these operations are accounted separately, typically the production company’s group of companies/activities are operated by the same team, in the same office.

Figure 11.1 Business structure and revenue flow

As these operations result in individual productions, most independent production entities form at least two of these operations into separate companies.

1. The production company becomes a holding, asset management and overall operations governance entity.
2. The development operations are directed by the production company team and are either part of the production company or can be beneficially operated from a separate entity for funding and operating clarity.
3. Each project is placed in its own separate single project producing company as part of its final stage development activities.

Operation and Company Inter-relationships

The permanent office location for each of the producers’ operations/companies is most often in the production holding company office. The production holding company usually owns all the producer’s share of each development and single project company.

Development Company Financing

Development is that most essential creative gestation precursor essential to project production. The most common reason for project failure is that the producer under-developed the project creatively (most often the script), or the business elements (typically the failing to set up the project’s largest territory’s distribution), or both. Just as is done with each project’s production, producers should thoroughly plan, schedule, and budget each development slate.

Each new development company could be launched around a specific business and investment return plan, prepared by the producer, to develop and produce a specific number of pictures over several years (for instance, three pictures over five years). This plan should include a monthly activity projection. These activities include script development, meeting with likely co-production, distribution, ancillary, brand, and financing partners outside of and during key trade events. Also, meeting with directors, agents, and lead cast, preparing production funding, and all else necessary for project production. The capital needed for this development company is discovered through the preparation of a cash flow projection that corresponds with the company’s activity projection. These projections are presented in Chapter 12. Seasoned production companies typically finance their projects’ development from their own profits. Studios and co-production relationships are also common resources to provide part or full development financing. Regardless of the source for development funding, this activity should be planned, directed, and financed as if being accountable to outside investors.

Investors evaluate investment offerings primarily by each offering’s risk, term until potential investment recoupment, investment amount, and earnings potential. Consider Figure 11.2, of the basic investment performance comparing project development and project production.

Figure 11.2 Motion picture development vs. production investment risk evaluation

Granted, there are risks in each offering. Yet, companies with solid development performance can give investors opportunities with a lower investment amount and higher premium return in a shorter return period—qualities that investors typically prefer.

Production companies seeking private investors for their development companies typically offer their investors a high (150%) return, coming from the production budgets, so it should be recovered within 12 to 24 months from their investment at the start of principal photography. That could also be sweetened with a modest (2–5%) participation in all the the producer’s gross profits. Or they could offer investors a low (115%) return from the production budget that could be paid within 12 to 24 months and then an ongoing participation (15%–25%) of all the producer’s gross profits.

For development investors who prefer an even higher producer’s gross profits participation in the projects, they could negotiate leaving all or part of their capital in, getting repaid at whatever participation percentage they negotiate, to receive a higher percent of all producer’s gross profits.

Earnings typically flow into the development company from its sale of all rights, title, and interest from each fully developed picture to one of the production holding company’s single project companies. The amount of each of these sales can either: (1) be preset as a fixed amount, as presented in the development company’s offering, or (2) be an agreed upon percentage of return on investment (ROI), for instance: 150 percent.

Seasoned producers recognize that development is neither time nor expense certain. So, the investor’s risk is real. However, a good match can be made between producers with solid development experience and financiers seeking a project investment structure with lower investment, early return, lower risk, and a motivating ROI.

Securities

Regardless of the global territory, investment offerings of all kinds must conform to all securities laws within the area where the solicited investors reside. These laws and regulations are highly sophisticated, and producers should have their offerings prepared by their legal and accounting advisors. The planning and preparation of a development investment memorandum is discussed in Chapter 12.

Forms of Companies

There are several forms of company structures, each having several advantages. Producers are best served meeting with their legal counsel, who will lead them through a series of questions, the answers to which should reveal the best company structures for their operating, financing, taxation, growth, and protection objectives.

If just one person is involved, a production company may be commenced as a sole proprietorship. Often, these organizations may begin their legal life by simply filing a fictitious name with a local recording office (in the United States this is usually with the county clerk) according to the directions given by the recording officer. This gives the producer the documentation needed to open a bank account and officially use the name recorded in the area in which it is registered. This is quick and inexpensive, but it does not give the producer the legal protections that comes with more sophisticated company structures.

Once a production company is ready to commence earnest business, most attorneys will suggest that it form an LLC or incorporate. This delivers the owners (partners and stakeholders) personal legal protection from actions that may be taken against the entity. When the entity is still limited in its partners/stakeholders and earnings, it can receive special tax status that will allow the tax liabilities to be passed through to the stakeholders, so they are not burdened with an additional entity taxation.

In the United States, the most flexible and popular structure producers use for protection and single instead of double taxation is a limited liability company (LLC) or a sub-S corporation. In most states in the United States, the cost of setting up an LLC or corporation are the same.

Chapter Postscript

Company structure is important at production company start-up, and that importance increases as the organization grows. Structure determines principals and asset protection, investor and other partner rights and access, operating controls and flexibility, and taxation of the entities and those who are participants and owners. Balanced producers adopt structures that promote and enable their project development, production, and global exploitation—structures providing them with the greatest operating power, structural stability, and which optimize profits, and long-term growth. Producers who model their operations after this pattern are most likely to succeed and receive these capstone benefits.