Written By: Leah C. Stevenson, Esq.
What is a Loan Out Company?
If you work in the entertainment industry or you have researched industry standard terms, then you have likely heard the term “loan out company” used more than once. Loan out companies, sometimes referred to as “loan outs”, are widely known and vastly used by music artists, talent, and other professionals in the entertainment industry. Although loan out companies are well-known within the industry, you may still be wondering what a loan out company is and why people use them as well.
A loan-out company is a business entity, commonly formed as a limited liability company (LLC) or corporation, set up for the purpose of “loaning out” the services of the entertainment professional, specifically music artists in the industry. Once the loan out is formed, the artist becomes an employee of the company, the loan out enters all deals and agreements on behalf of the artist, and the company agrees to “loan out” the artist’s services.
The loan out company is the actual party to the agreement while the artist may be obligated to perform certain services as outlined in the contractual language. Since loan out companies are standard in the entertainment industry, most agreements contain inducement letters which are often executed by the music artist. The inducement language generally states that the artist acknowledges the obligations and representations the loan out company has made in the agreement. If the loan out company fails to perform its obligations, breaches its representations and warranties, and/or fails to indemnify the other party, then the artist would likely be the next party the contracting party could look to.
What are the Benefits of a Loan Out Company?
There are many benefits for music artists who properly form and use loan out companies in the entertainment industry and we will explore three benefits of loan out companies in this blog post.
The first benefit is asset protection which allows the music artist to limit its personal liability and create division between the music artist’s personal assets and the loan out company. Effectively, the music artist’s property could not be used to repay debts of the loan-out company unless the loan out defaulted on its obligations and the the inducement language was triggered. Ideally the music artist’s personal assets, including bank account, car, houses, and any other physical property could not be immediately attached or used to satisfy the debts of the loan out company.
Secondly, loan out companies are afforded tax benefits, but I will not get too far deep into the weeds on this one as I am not a tax attorney. Overall, LLCs (taxed as S corps) and corporations often experience tax benefits for corporate expenses. In the long term, a music artist could benefit greatly by using a loan out company because the revenue they receive in the industry, namely large advances and royalties, would be paid directly to the company. The artist would receive a fixed salary from the company while the loan out would be able to write off expenses and enjoy tax benefits of similar corporate structures.
Lastly, loan out companies provide music artists and other professionals with an ability to protect and manage their intellectual property. Music artists generally assign rights to their trademarks and copyrights for musical compositions, sound recordings, and other intellectual property rights over to their loan out company where all the assets can be kept and managed in one place. Apart from asset protection, taxation, and intellectual property management, there are many other benefits of loan out companies as well which is why loan outs are heavily used in the entertainment industry.
What are the cons of a Loan Out Company?
Although loan out companies are heavily used for their various benefits in the entertainment industry, there are a few downsides to maintaining a corporate structure as well. These downsides include startup costs, maintenance fees, and general business expenses.
While having a company is always an achievement, the biggest downfall for most people is certainly the startup costs and the costs to maintain a business entity as well. For instance, in California it may cost $0 to start an LLC (new rule until mid-2023), but the annual franchise fee is $800. Yes, you read that correctly, I said the annual franchise fee is $800 and that is payable to the state whether you have turned a profit or not. So, it may not cost much to form the LLC in California, but it costs $800 a year just to maintain the company. That’s pretty expensive if you don’t have much income flowing into the company to offset this large corporate expense.
But why form a loan out company?
Although there are a few downsides, loan out companies are standard in the entertainment industry because they provide limited liability, tax benefits, and asset protection as well. LLCs and corporations may be expensive to start and maintain, but they seem to save music artists and other professionals money and headaches in the long run.
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