THIS BUSINESS OF TELEVISION, Third Ed.
Howard Blumenthal and Oliver R. Goodenough
Billboard Books, 2006
The sole proprietorship is an individual doing business on his or her own behalf. In most
states, a sole proprietor using a fictitious business name must be identified and registered
by filing a "doing business as" (DBA) certificate, with a designated authority (e.g., a
county clerk or the Secretary of State’s office – check your local law). A sole
proprietorship may hire employees, and the individual in charge must personally comply
with tax, social security, insurance, and other employee-related government
requirements. A sole proprietor is also subject to unlimited personal liability for all debts,
claims, and obligations of the business. A sole proprietor pays personal income tax on the
profits from the business; for larger businesses, this can become rather complicated, and
retaining the services of a good accountant throughout the year is recommended.
Outsiders can make investments in the form of a loan, or by contractual arrangements
that set a rate of return. If profits and losses are shared, however, the law may deem the
entity to be a partnership.
Traditionally, there were been just two types of partnerships: general and limited. A
general partnership is an association of two or more persons who jointly own and operate
a business, typically sharing profits and losses. A limited partnership has two kinds of
partners: general partners and limited partners. General partners are responsible for the
operation of the business and are liable for its financial obligations; the limited partners,
who are not involved in the operation of the business, are passive investors liable only up
to their stated capital contributions. More recently, the ―limited liability partnership‖
(LLP) and the ―limited liability limited partnership‖ (LLLP) have joined the list in many
states. They run just like the general partnership and limited partnership, r espectively,
but will also give limited liability to the general partners if a necessary filing is made.
Partnerships do not pay federal taxes on their income. Instead, profits and losses are
passed on to the partners, who pay taxes as individuals. Profits and losses from the
partnership can be offset by the performance of other ventures, but limited partners and
other passive investors face restrictions, which often limit the offset to other so-called
passive investments. The partnership must file an information return with the IRS and
with applicable state and city agencies. It may also be subject to sales, property, and other
non- income taxes.
A general partnership is usually formed by negotiating and signing a partnership
agreement which defines the duties and fights of the partners. In most states, the partners
can be any recognizable independent entity: individuals, agencies, limited liability
companies, corporations, trusts, even other partnerships. The agreement normally
specifies the amount of capital or the kinds of services that each partner is to contribute to
the partnership, and it specifies how profits and losses are to be allocated to the partners
(profits may be treated differently than losses). The agreement may also detail how the
partnership is to be operated: who is to work full-time, and in what capacity; whether
unanimous agreement is needed to admit new partners; how partnership decisions are to
be made; and how and when the partnership is to be dissolved. If particular conditions are
not specified, or no formal agreement has been signed, the relevant state law will apply
and will usually provide answers to these and other questions. As to third parties, each
general partner is individually liable for all of the debts, claims, and other obligations of
the partnership, unless a filing has been made establishing it as an LLP.
In most states, a partnership using an assumed name must file an assumed- name
certificate with the county clerk or some other designated official. It must also comply
with employment rules and other laws applicable to any business structure.
Under U.S. law, a joint venture is a general partnership formed for a specific, limited
purpose, such as the production of a particular television program or series. Joint ventures
are governed by the agreements founding them and by normal partnership rules.
A limited partnership is similar to a general partnership except that it has two kinds of
partners: general and limited. A limited partner is akin to a shareholder in a corporation—
a passive investor who is not individually liable for the debts of the company.
Traditionally, a limited partner could not, by law, participate in the day-to-day
management of a limited partnership without risking the loss of limited partner status,
although this rule is being relaxed in a number of states. Because it resembles both a
partnership and a corporation, the limited partnership has often been appealing to a
partner who wants to supply capital but not be involved in management, although its role
is diminishing in contemporary use with the rise of the limited liability company (more
Limited partnerships are governed by the rules similar to those that apply to general
partnerships, with some key differences. For instance, statutes authorizing limited
partnerships go to considerable length to insure that third parties are not led to believe
that the full credit of limited partners is standing behind the debts of the limited
In order to form a limited partnership, the general partner(s) must file a certificate of
limited partnership in the office of the appropriate state official (e.g., secretary of state,
county clerk). This certificate generally states the name (which typically must include
―L.P.‖ or ―Limited Partnership‖), address, and class of business of the partnership, as
well as the name of each partner, his or her address, and his or her status as a general or
limited partner. In some states, the certificate also details each limited partner's
contribution to the partnership (in cash or property), to what extent any additional
contribution may be required, and the right of each limited partner to compensation (a
share of income, for example). The certificate must be amended whenever the
information changes. A general or limited partner may be an individual, a general
partnership, a limited partnership, or a corporation. Several states also require the
publication of this information in a local newspaper.
If a limited partner's name is used in the name of the limited partnership, or if he or she
takes part in the management of the business, then he or she may be considered a general
partner, no matter what the agreements say. Still, a limited partner usually has the right to
give general advice concerning the operation of the business, to inspect the books
periodically, to receive a formal accounting on a regular basis, and to seek dissolution of
the business by court order. A limited partner may also do business with the limited
partnership; for example, a limited partner may loan money to the limited partnership.
The partnership agreement may authorize or restrict the admission of additional limited
partners. The agreement may provide an order of priority among the limited partners with
respect to profits or return of their contribution. In the absence of such an agreement, all
limited partners are equal, usually on a ―pari passu‖ basis (see page ___).
Typically, a limited partner may not withdraw his, her, or its money unless (1) the other
partners consent; (2) the certificate is canceled or amended to reflect the reduced capital
of the partnership; or (3) the assets of the partnership exceed its liabilities (excluding the
liabilities of the partnership to the general and limited partners for their respective
contributions). If the partnership is being dissolved, then procedures are detailed by either
state guidelines or the partnership agreement. If a limited partner withdraws, that partner
still remains liable for the amount of money withdrawn (plus interest) if that money is
needed to pay debts incurred before the withdrawal.
In the past, there were many tax advantages to investing through limited partnerships, and
they were frequently used for tax shelters. As with other partnerships, losses could be
passed through directly to partners, including the limited partners, but profits were not
subject to double taxation. Tax reform has severely limited the benefits by making
limited partnership income and loss "passive." Passive losses can only be offset against
passive income, which does not include wages and fees. This has put an end to most
limited-partnership investments motivated by tax savings.
In keeping with the overall trend in permitting more and more limitations on liability,
some states now offer the possibility of creating a limited liability limited partnership (an
―LLLP‖), where, with the right kind of filing, the general partners can receive limited
liability treatments as well.
LIMITED LIABILITY COMPANY
Over the past couple of decades, the world of business organizations has been
significantly altered by the addition of a new hybrid form: the "Limited Liability
Company" (an "LLC") Previously, business owners who wanted to limit their personal
liability for the debts of the business either had to use a corporation, which was not
always as flexible as might be desired and which had significant tax complications (see
below), or had to use a limited partnership, which gave limited liability only to non-active
participants. With the adoption of the LLC across the U.S. (and with the addition of the
LLP and LLLP – see above) business owners can now gain the flexibility of a partnership
and with the limited liability of a corporation.
In order to form an LLC, it is necessary to file "articles of organization," typically with
the state's secretary of state. These articles usually set forth the name of the LLC (which
requires including the words "limited liability company," the abbreviation "LLC," or
some other permitted variants, its registered address, its agent for service of process, the
name and address of each organizer (who need not be one of the business principals), and
any personal liability which the owners are assuming. It must also describe whether the
LLC is to be managed by its members (i.e., owners) as a whole or by some designated
group of "managers" who may or may not be members as well. Certain other principles
of management may also be put in the articles, although these usually are part of t he basic
agreement between the members, called the operating agreement. Although the LLC
statutes of most states provide backup "default rules" by which the LLC can be run, in
most cases these rules can be superseded by the provisions of the operating agreement.
This gives the LLC tremendous flexibility in the hands of a skilled attorney.
From a tax standpoint, the LLC is a major beneficiary of the current "check the box"
approach to classifying non-corporate business forms. The organizers of an LLC get to
―check the box" on an election form to tell the IRS whether they want the LLC taxed as a
partnership or as a corporation. This further flexibility has helped to make the LLC very
popular as a form for organizing new businesses in the U.S., and one that just about
anyone setting up a new business should at least consider.
In many states, even the LLC is no longer the last word in hybrids; the LLP, mentioned
above, is also a form of interest. This innovation initially came about to allow limited
liability to be applied to law firms and accounting firms which could not, for certain
licensing reasons, be LLCs. They have taken on a life of their own for some small
businesses as well, particularly with the possibility of "check the box" tax treatment. It
may be worth asking your attorney about the availability and advisability of using an LLP
for a new business.
In Latin, the root word "corpus" means "body." As this suggests, the corporation is
viewed by law as a separate legal entity, a body distinct from any other entities which
may own interests in it. Most U.S. corporations are established under state laws. A
corporation is formed by filing a certificate of incorporation, sometimes called "articles
of incorporation," with the appropriate state official (usually the Secretary of State). This
certificate first states the name of the corporation, which must usually include the words
"Incorporated," "Corporation," or "Limited" (or an abbreviation of any of these terms) to
indicate corporate status. Specific terms vary from state to state. The certificate also
indicates the business location; its purpose; the number, type, and stated value of shares,
along with a description of the rights or restrictions applicable to any type of stock; and
the duration of the corporation (usually it is perpetual). Amending the corporate
certificate normally requires special majority approval of the stockholders, and there may
be other requirements in addition. Further rules regarding the operation of the corporation
(usually called the "bylaws") may be written and used, but they do not need to be filed.
The bylaws provide specifics on how the company is to be operated; if neither they nor
the certificate covers a particular matter, then standard rules under the governing state
Those who have invested in the corporation become stockholders, but the class of their
shares, and the rights that go along with them, may vary. "Common shares" normally
carry some form of unlimited profit participation and some form of voting power.
"Preferred shares" normally carry a first right to profits (though frequently with a limit)
and may entitle the shareholder to limited voting rights.
Various hybrid types of shares may be created for specific purposes. Shares of stock are
normally transferable; they can be bought or sold at any time, subject to certain state,
SEC, and in-company restrictions. Profits are paid as dividends in accordance with the
rules regarding types of shares, or are held for corporate expansion. Shareholder s may
inspect the books and records of the corporation, and if they believe that the directors or
officers are behaving improperly, they may take legal action to stop the wrongdoing and
Traditionally, the business of a corporation is overseen by a board of directors, which
often consists of three members or more, elected yearly by the shareholders. If there are
fewer than three shareholders, then there usually can be fewer than three seats on the
board of directors. The board is responsible for setting corporate policy, for approving
significant corporate actions (like large expenditures), and for electing the principal
There is often flexibility in the officers elected, although some states require a president
and a secretary, and treasurer and vice president are other common officers. Function
based titles are also common, either by themselves or coupled with the traditional set:
Chief Executive Officer (CEO), Chief Operating Officer (COO), Chief Financial Officer
(CFO), and General Manager (GM) are all in frequent use. Further creativity with titles is
possible, within the limits of the bylaws and the desires of the board of directors.
Since corporations are treated as separate legal entities, they file income tax retur ns and
pay taxes on income. They do not have the "check the box" options enjoyed by LLCs and
LLPs. Profits are taxed at the corporate level, and dividends to shareholders are taxed as
individual income. The exception is the S corporation, described below.
Some corporations with few stockholders and actively engaged owner- managers elect
treatment as ―close corporations.‖ Many states permit electing close corporations to be
governed as if they were partnerships. With the advent of LLCs and LLPs, however, t he
need for this option has diminished.
The S corporation, formed in accordance with Sub-Chapter S of the IRS Code, is a
special type of corporation for tax purposes. (The regularly taxed corporation is called a
C corporation, a term rarely used.) An S corporation has the same basic organizational
structure as a regular corporation, but has some of the tax advantages of a partnership. S
corporation status is obtained by filing an election within two-and-a-half months of
formation, or, with respect to succeeding years for established companies, within two-
and-a-half months of the start of the year that precedes the year that the election is to take
An S corporation must file an information return with the IRS, but it pays no federal
income tax. Instead, profits and losses are passed on to shareholders, and monies are
treated as personal income. This helps to avoid double taxation on profits and allows
losses to be deducted (up to the shareholder's investment in the S corporation). Excess
losses may be carried over from previous years on personal returns—subject to
limitations that are best described by an accountant familiar with current IRS regulations.
An S corporation may have up to 100 stockholders, none of whom can be non-resident
aliens or commercial entities. In addition, an S corporation cannot be a subsidiary of
another corporation. Other rules are equally stringent. Additional information can be
found in the instructions to IRS Form 2553. Some states do not recognize S corpo rations
as distinct from regular corporations for purposes of state income tax.
Individuals active in the entertainment business have often used "loan-out corporations"
as a vehicle for providing their services. The theory of the loa n-out corporation is simple
enough. The individual forms a corporation which he or she controls. This corporation
hires the individual who formed it, with the salary to be set from time to time to reflect
the activity of the corporation and its other financial needs. Then the individual gets a
job, either short-term (a writing, directing, or acting assignment) or long-term (becoming
executive producer on a series). Instead of the individual being hired directly, the deal is
made with the loan-out company, which in turn lends the services of its employee. In
order to give the hiring company legal comfort that the individual will be committed to
doing the work, the individual invariably signs an "inducement letter," which confirms
that he or she will do the work and will look only to the loan-out corporation for
The original reason why many people in the television business set up loan-out
companies was to take advantage of favorable tax breaks that were available to
corporations but not to self-employed individuals. In particular, there were considerable
advantages in the amount of pension monies that could be saved on a pre-tax basis. Over
the years, most of the benefits have been eroded by reforms to the tax laws; furthermore,
the IRS has taken a dim view of loan-out arrangements, and has challenged their use in
some cases. Nonetheless, many people who have loan-out corporations have kept them in
place, in part to preserve old benefits (such as existing pension and/or profit-sharing
plans, or health- insurance relationships), in part because they provide some centralization
to a fragmented set of employment relationships, and in part because certain kinds of
deductions, such as those for a business car or a personal assistant—may be less
scrutinized by the IRS if taken by a corporation rather than an individual.
Setting up and maintaining a loan-out corporation does involve some trouble and
expense, so anyone who is considering forming one should consult with a tax advisor
over the potential costs and benefits.
With the increased globalization of television, video, and other media, many foreign
entities are now doing business in the U.S. These entities will have their own names,
roles and forms, governed by the laws of the country in which they are established. As
with U.S. business forms, the initials associated with a foreign company’s name
sometimes tell you about its origins and character. Some commonly used examples are:
AG – Aktiengesellschaft: This translates to "stock corporation," and is used in
Germany and other German speaking countries. While this form often denotes a
publicly traded companies, not all AG's are publicly traded.
GmbH – Gesellschaft mit beschränkter Haftung. Also a German term, meaning
"company with limited liability." GmbH indicates that the company is
incorporated but privately held.
NV – Naamloze Vennootschap: A Dutch corporate designation, which includes,
but isn’t limited to, all publicly traded Dutch companies,
PLC – Public Limited Company: a public company in the UK, Ireland, and some
other English speaking countries.
SA – Société Anonyme: This designation is applied to many limited liability
corporate entities in France and several other countries.
Sarl – société à responsabilité limitée. A designation used in France and other
French speaking countries, denoting a privately held company.
For an extensive listing, see www.corporateinformation.com/defext.asp.
Different countries also have different governance structures and different names
commonly applied to important corporate officials. In the UK, for instance, the role of
director and CEO has often been combined in a person called the ―managing director.‖
In Germany, AG's have a double board – the Vorstand (usually made up of the CEO,
CFO and other top management), and the Aufsichtsrat (a "supervisory board," overseeing
management and representing shareholders).
Any entity (a corporation or an individual) not normally resident in the U.S. that is
judged to be "doing business" in the U.S. may be liable for U.S. income taxation, and
subject to state corporate qualification. If U.S. taxes apply, then the company must fill out
a tax return covering all worldwide income allocable to the U.S., and must pay at the
applicable standard rate (for example, personal or corporate). Cross-border co-production
deals can be deemed to be partnerships doing business in the U.S., and potential foreign-
production partners should structure the arrangement to avoid U.S. tax involvement. A
non-resident foreign entity which is not judged to be doing business in the U.S. may
receive income earned from business dealings with U.S. companies or from passive
investments in the U.S. without filing a U.S. return—although a withholding tax of up to
30 percent will often be deducted at the source of payment. This approach can be varied
by tax treaties, which frequently exist between the countries in question. Individual
entertainers and production workers may also be subject to withholding at a flat or treaty
determined rate. Further information is available from the IRS in Publication 515,
Withholding of Tax on Nonresident Aliens and Foreign Entities, and in Publication 519,
U.S. Tax Guide for Aliens.
TAX ISSUES FOR U.S. RESIDENTS AND COMPANIES
Many people in the television business are self-employed, or work freelance, without a
permanent business affiliation. For tax purposes, these people will need to deduct a
variety of expenses related to their work. Unfortunately, the IRS has made the deduction
of many of these expenses more and more difficult. For instance, freelancers often work
out of their homes, and would like to deduct the expense of a home office. This is now
possible only if the home office is fully dedicated (100 percent) to work purposes: a desk
in the comer of what is otherwise a bedroom, living room, or family study will not
qualify. In addition, home-office expenses can only be deducted from the income which
the business conducted from that office actually produces. More information is available
in IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses, Publication 535,
Business Expenses, and Publication 587, Business Use of Your Home (Including Use by
Home workers are often writers or artists. The IRS has required writers to hold off on
deducting some kinds of writing expenses on projects until the project is completed. The
IRS also generally forces a writer to treat advances as taxab le income when the advances
are actually received, as opposed to delaying until delivery of the finished work.
PRODUCTION ADVANCES, EXPENSES, AND COSTS
The tax treatment of production advances, expenses, and costs can be a source of
potential problems to a production company. On the expense side, a television project is a
capital asset, and the expenses associated with its development and production should be
capitalized by the producing entity until such time as the project is put into distribution,
sold off, or abandoned. If it is sold or abandoned, all of the costs then become deductible.
If the project is put into distribution, or the producer otherwise retains an ongoing
participation, the costs are deductible over a period of time. This period is usually the
anticipated economic life of the program as calculated using the "income forecast
method," which ties the deductibility to the rate at which the anticipated revenues are
In most instances, however, the producer will have received advances over the course of
the production to help finance the program. In a worst-case scenario, the IRS could
characterize these advances as income that is taxable when received—yet not allow any
deduction of the related expenses until the program is delivered or shown. If these two
events—the receipt of the advance, and the showing or delivery of the project—fall in
different tax years, it is conceivable that there could be a distorted amount of income
recognized. Most production companies avoid this by claiming that they are not in receipt
of the advance until the program is delivered, and that until that point, the advance is
really just a non-taxable loan. If this approach is taken, it can be useful to be sure that the
documentation is consistent with it. Producers also point out that if the advance is
income, then the show has in effect gone into service already, so that they should deduct
its expenses. Unfortunately, the theoretical underpinnings of these arguments may be
open to question. Any production company that is likely to be receiving substantial
production advances should consult with tax advisors to help structure ways to avoid
unrealistic bulges in taxable income.