Individuals that get paid large amounts of money, like actors and other entertainers, need to find legal ways to protect their wealth. Celebrity loan-out corporations have become increasingly popular for good reason, because oftentimes a loan-out company can be formed as a separate legal entity, serving as wealth protection for a high-net-worth individual.
The individual, typically in the entertainment field, who sets up the loan-out company becomes an employee of the loan-out corporation. The corporation will loan out the services of the individual who sets up the company. For example, a recording artist’s loan-out company may loan their services out for performance.
How to run a loan-out company successfully
Using a loan-out company can save a production company and the actor or recording artist a lot of money, especially on individual and payroll taxes. A production company will make the check payable to the loan-out company instead of the actor or crewmember. Since the actor is an employee, the loan-out company pays payroll taxes, saving the actor or recording star a ton of money.
What is a loan-out corporation’s IRS structure?
A loan-out company is typically a single-owner LLC. They will typically choose to be taxed as an S corporation. This company is the intermediary between the talent and a third party looking to purchase the individual’s services. It is not a unique entity, such as an LLC or corporation. “Loan out” is simply a term to describe a single-owner company that aims to improve an actor’s asset protection while giving tax benefits to the individual employed for short-term engagements.
Benefits of a loan-out corporation
People who earn in the region of $100,000 a year using short-term engagements may be able to benefit from this type of setup, as the loan-out arrangement offers possible tax savings, which entertainment professionals may not have access to in their individual capacity.
The company also gives the entertainer the option of asset protection. A loan-out corporation can purchase insurance to add more personal injury liability protection.
The loan-out company’s finances must be separate from those of the entertainer. An accountant should open a different bank account for the expenses and income of the company. Lawyers will create a separate contract between the company and the artist who owns the company or the artist’s services if there is a lawsuit or audit of the company’s finances. Contracts should only be made in the name of the company and with the manager signing the contract.
How to create a loan-out company
Creating loan-out companies is the same as creating other corporations. You will need to file information with the Secretary of State and then pay filing fees. Several decisions would need to be made in the corporation’s name, such as the type of corporate filing, C Corp., LLC, or S Corp. Other decisions include the name of the corporation and those in charge of running the corporation. From there, you’ll need to decide on what your goals are and create a clear path to each of them. You will also need to manage the accounting side of your business seamlessly to ensure accurate reporting to the IRS.
Knowing when to form a loan-out company
These companies are not suitable for every situation. There are actual expenses involved. There are legal fees related to setting up the corporation, filing fees paid to the state, and in some places, automatic annual fees that have to be paid to the franchise tax board regardless of how much income is earned by the corporation. Many tax advisors believe that loan companies are not beneficial unless the income exceeds $100,000 a year.
It is always essential to get advice from your CPA or a tax advisory service if you think about setting up loan-out companies. We can help you select the best entity structure for your unique circumstances. We also aid with tax planning completing relevant tax forms and filing articles of incorporation. Schedule a discovery call with us to discuss the viability of starting a loan-out company for you.
This blog article is not intended to be the rendering of legal, accounting, tax advice or other professional services. Articles are based on current or proposed tax rules at the time they are written and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.
