February 28, 2006

Documentaries are Businesses--or Should Be

So you want to make a documentary. Should you get investors and incorporate a business? Should you set up a nonprofit or use a fiscal sponsor to get grants? Should you just pay for the whole thing yourself? The road you choose has significant legal and financial implications and should be considered before you ask for the first dollar--and perhaps before you shoot the first frame.

Please note that this article is merely an introduction to these issues. You should consult a lawyer and a tax advisor before setting up your business. Seek assistance from specialists throughout the process of creating your production company.

Go Solo or Incorporate?
We've all heard stories about filmmakers who had no partners, produced their documentaries themselves and paid for it on their own or with the help of informal investors. Those filmmakers were acting as "sole proprietors" of a production business.

A sole proprietorship is the easiest of all business structures to launch and the least expensive to set up. Bookkeeping and taxes are not too complicated, as long as you track everything separately. However, there is no legal distinction between the business and yourself. In other words, your personal assets are vulnerable should anything go wrong. (In many states, your spouse's assets, too!)

In general, it's a not good idea to operate a sole proprietorship for a "risky" business. In the course of making any documentary, bad things can happen, such as having an accident while driving to or from a shoot; someone getting injured while working; having expensive equipment stolen or damaged; or inadvertently encroaching on music, image and/or story rights. Finally, you are producing a relatively expensive product for which there are significant up-front costs and, sadly, a history of a low return on investment. While obtaining insurance can provide protection should unpredictable and unfortunate things happen, you may still want to consider incorporating, particularly if you have major personal assets.

Incorporating helps to shield businesspeople should debt, lawsuits or other issues threaten the company. A corporation (either for-profit or nonprofit) is legally considered a separate entity that can own things and make agreements. It is taxed independently. A corporation has its own assets and liabilities, separate from yours.

It does take work to incorporate. It requires a board of directors and consistent and accurate record-keeping in all aspects of operation, and it can have complex paperwork. It also costs to file articles of incorporation, and generally there are taxes and fees that must be paid every year. On the other hand, you can get significant tax breaks and access employee benefit structures, group retirement plans and a host of other systems set up to support corporations.

What's the Difference between a Nonprofit and a For-profit Business?
A for-profit business is created to achieve a monetary profit to be shared among owners, shareholders, investors or others, depending upon its structure.

A nonprofit business is created to achieve a charitable, educational, scientific, religious or literary mission to benefit the public good.

Most production companies operate as for-profit businesses, but documentaries have a unique role in the world of filmmaking. Many are made with a social change or educational outcome in mind. For this reason, it is conceivable that making documentaries can be part of a nonprofit, and that funding can come from donors and foundations that desire a social benefit result rather than a monetary return on their investment.

Does "Nonprofit" Mean "No Profit"?
No. Nonprofits are welcome to earn more than they spend. In fact, they should be encouraged to do so. A nonprofit is still a business--a business that needs insurance, equipment, electricity, staff and all kinds of other things that cost money.

So...Incorporate a Nonprofit or a For-profit Business?
How you incorporate really depends on what funding you want and how you want to handle future profits and losses.

Consider what types of funding are available for your documentary based on its subject and/or structure. Is this something that can attract investors or corporate support? Then you might choose a for-profit. Is this more likely to need foundation money or donations from issue-oriented people and organizations? That sounds like a nonprofit project.

Now imagine that your documentary is a huge hit. Think about the profits. That money would either be distributed to investors and shareholders including yourself (for-profit), or re-invested back into the company to further its mission (nonprofit). If your documentary loses money, the debts are similarly parceled out.

For-profit Options
There are several structures of for-profit businesses. Choosing among them depends mainly on what you expect the company to do in the future. Your thinking can start with two basic structures:

Forming a Corporation--The benefits of a corporation include a lower tax rate on revenues, being able to pay yourself a salary and benefits and enabling you to court investors with the promise of profit-sharing if your documentary makes it big. The difficulties include structural requirements and having to keep records that demonstrate that you are maintaining a good separation between the corporation and yourself, including minutes of meetings and separate accounting systems. Corporate taxes can also be complex.

Forming a Limited Liability Company (LLC)--An LLC can be structured so that its income is reflected on the individual tax forms of the members. However, you would have some liability protection over personal assets should the LLC go into debt or get sued. It combines some of the taxation ease of a sole proprietorship with the general liability protection of a corporation. Like a corporation, there are fees and plenty of paperwork involved in setting up an LLC, and there's frequently a minimum tax.

Nonprofit Options
If you've decided to take the nonprofit route, you still need to choose between getting your own 501(c)(3) designation from the IRS or using a fiscal sponsor. Getting a fiscal sponsor is basically making your film a project of an existing nonprofit with a compatible purpose.

If your mission is "to raise awareness of ____ issues within ___ community" or "to support the making of ___ type of films," then you have the beginnings of a nonprofit. If your mission is "to get foundation money to complete my film," then you should find a fiscal sponsor. It's a lot of work and responsibility to create and run a nonprofit--too much, really, to start one in order to make just one film.

Starting a Nonprofit--Operating a nonprofit has several benefits. The business doesn't pay taxes on income gathered through activities related to the mission (although your salary would still be subject to payroll taxes, etc.). Donors to nonprofits can get a tax break for their contributions, and some foundation money is only available to registered 501(c)(3)s. But before you jump into this enterprise, know that there are restrictions, violations of which can result in losing your nonprofit status and requiring you to pay back taxes. Nonprofits can't participate in campaigns for or against particular candidates. They are also prohibited from acting to influence legislation "except to an insubstantial degree." (How much of your money and time is considered "insubstantial" can vary by case, but the IRS scrutinizes this and you should undertake any lobbying with care.) Earning too much in an activity not related to the nonprofit's mission jeopardizes its status. If you dissolve your nonprofit, any company assets (including films owned by the nonprofit) must be transferred to another registered 501(c)(3) and can't end up in private hands. Setting up and maintaining a nonprofit requires a fair amount of paperwork and rigorous accounting structures.

Using a Fiscal Sponsor--Fiscal sponsors act as an umbrella for your project, allowing you to "use" their nonprofit status when gathering donations or applying for grants. They'll manage the financial and reporting requirements of incoming funds in exchange for a small percentage. They may also help you find additional resources. More important, getting a fiscal sponsor means that you won't have to do the paperwork and management of getting nonprofit status, and when the project is over, you won't have a whole business to shut down.

Lastly: Are You a Filmmaker and a Businessperson?
You should always consider your own personality when making these huge decisions. Do you enjoy running numbers, managing a project or keeping tabs on everything? You might be well suited to run your own company. Are you more likely to turn things in late, hate thinking about costs and get cranky if you have to do paperwork? You need a partner.

Making a documentary is a complex project that needs a plan. Choosing a business model up front that best serves your visions for your film and your life should be part of that plan.

 

Cianna Stewart is a freelance consultant for nonprofits and a documentary researcher, writer and director. She splits her time between Northern and Southern California, and can be reached through www.ciannastewart.com.

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