Giorgio 1

Anthony Giorgio

Martha Taylor

College Forum

23 March, 2018

Creating a Film Production Company from Scratch

During my sophomore year, I began a film endeavour with a friend, erstwhile AMES

senior Austin Overmoe, for his senior project. The film was entitled ​St. Charlie​ and with it we

created a mock-up production company, “Wanderer Productions” (which became “Wandering

Productions” because the former had already been taken), as a name-only vehicle with which to

produce the film. As we wrapped production on ​St. Charlie​, Wandering Productions––which

began as a mock-up to add a veneer of legitimacy to our amateur project––had become a

successful business relationship between friends, and it looked like something worth continuing

and investing time in. During my junior year, I spoke with Martha Taylor about bringing AMES

interns to Wandering Productions, and she said we needed to be a legally-recognised business

entity before that would be possible. This became my goal, and for my senior project, there were

three questions I set out to answer: 1) How do film production companies generally function? 2)

What business structure best suits our current needs? 3) How do I go about forming a Business in

the State of Utah?

Before I could even understand the answers to these questions, I needed a primer in

business and corporate vocabulary from my mentor, Brad Overmoe. He explained that the

different business structures, such as C-Corps or LLCs, were essentially tax classifications. The

names that would be most useful to us, in order from largest to smallest, were C-Corps, S-Corps,
 Giorgio 2

LLCs, partnerships, and sole proprietorships. The most important considerations of each of these

models were taxation and liability. In a C-Corp, profit is taxed in addition to the dividends to the

shareholders, so the members of the company are effectively taxed twice: once before they get

the money, and again after. An S-Corp functions similarly, but at a smaller level, as the owner is

required to pay herself a salary. Thus, the profits are taxed before the owner does payroll, and his

pay is again taxed as income. In neither of these entities are the owners personally liable for the

obligations of the company. In a partnership or sole-proprietorship, any profit to the company is

taxed only once, as income to the owner(s), but the owner(s) are personally liable for debts,

contracts, and engagements of the company. The LLC, however, marries the advantages of a

partnership with those of a corporation. The profits of an LLC are taxed only once as income to

the members, and because it is a distinct legal entity, the members are not personally liable for

the debts, contracts, or engagements of the company.

With that in mind, I searched through some legal websites to find out the standard way

production companies are formed and operate. I discovered a webpage called “Organizing the

Business of the Film Company” by New Hampshire law firm, Gallagher, Callahan & Gartrell,

the content of which was written by Jon M. Garon in his book “​The Independent Filmmaker's

Law and Business Guide: Financing, Shooting, and Distributing Independent and Digital

Films​”. It described an interesting and useful model which most production companies use,

which is called the “Nested LLC Model”. In short, the production team forms and maintains their

own LLC, and the movie it produces is formed as ​its own ​LLC, of which the Production LLC is

the sole manager(Garon). This is an ideal situation because the Production LLC can retain

artistic and logistic control of the Film LLC, but other producers and companies can invest in the
 Giorgio 3

Film LLC without having to invest in the production company. This way, all of the films

produced by the Production LLC are kept kosher (meaning that films by the same company are

not competing for investment dollars), and investors are only married to the company for the

space of one film at a time.

Now, as for what I have read about the various business types, including the nested LLC

model, it seemed to me that, for the time being, the most prudent organisation of Wandering

Productions would be the Limited Liability Corporation, or LLC. I and the other partners talked

it through with my mentor, Brad, and we discussed the various definitions of the business types

that I mentioned above, but through the lens of pro/con. The LLC model couples administrative

and financial freedom with the legal protections of a business entity, and we thought that would

be the most expedient, at least for the near-future. Part of the reason for this is that becoming a

corporation would require that we pay ourselves a salary, which we can neither afford to do, nor

would we choose to for the time being, because we would like continually to reinvest our net

profits into future projects. An LLC has no specific mode of operation; the only requirements are

that the business have an Employer Identification Number (EIN) and pay taxes on profits

through a K-1 linked to each member. Anything else was subject to the Operating Agreement.

So, of course, Brad helped me write an Operating Agreement. He’s written and/or been

accountable to dozens in his life, so he copy/pasted some of the more thorough passages from

Agreements he had access to, and put them into one document for me to look at, pick apart,

research, and eventually use to construct my own Operating Agreement. I took this patchwork

agreement, as well as two Real Estate Agreements of Brad’s with unique structures, and

annotated them with questions, comments and concerns. Once I did this, he was able to explain
 Giorgio 4

to me (so I could also explain to the other partners) what capital accounts are, such terms as

pro-rata, sweat-equity and right of first refusal, and the difference between member-managed and

manager-managed companies. However, the discussion of pro-rata shares––the percentage of the

company which is owned by each member––complicated something for each of us. We could

understand fairly easily how percentage ownership worked when dealing with concrete items

like houses, apartment buildings and land, but in the context of Wandering Productions, we

would be dealing primarily with Intellectual Property, which is quite abstract in comparison.

I did some research of my own to understand IP, and Brad reached out to his friend Tom

Anista, who was far better versed in the intricacies of Intellectual Property law than Brad. I

found a website called “Writing Lion”, which is a blog site written by artists and writers,

exclusively about basic business/legal knowledge, advice and pitfalls they have faced.

Essentially what I found is that there is no legal standard for how Intellectual Property operates

within the context of an LLC, which sounds essentially useless, but informed us that, legally, we

must make our own rules––and the rules we create could either allow the potential for a lawsuit

or protect against it.

Not having the resources to consult an attorney, Austin, Paige and I hashed out our

preferred structure for the business, then worked with documents that Tom passed on and advice

from Brad to determine how we wanted to fit Intellectual Property into the company structure.

Two items in the agreement that was written up until that point formed the bedrock for IP. The

first was our pro-rata shares, which are as follows:

Member Membership Management Authority

Anthony: 40% 2 votes

 Giorgio 5

Austin: 40% 2 votes

Paige: 20% 1 vote

These shares will be reviewed after five years and Paige will have the opportunity to increase her

membership interest without a buy-in, which would give us all equal managerial authority, and

nearly equal membership interest: meaning that we three would have roughly equal ownership

and control over something which was created by only one of us. The second element was the

article relating to devotion of time by managers. We agreed that none of us ought to treat the

business as our primary concern (because of college), but that we ought to dedicate enough time

to ensure that the operation will continue to run, and run smoothly. Based on these, and Brad’s

input, we decided that the most prudent choice would be to assume that no intellectual property

created individually by a member would by owned by WP, unless it was explicitly signed into

the company with the proper paperwork. We decided that, because of the dedication of time

clauses, we could fairly expect each other to produce whatever IP was needed for smooth

operation of the business, and willingly sign in the necessary property. However, it was

paramount to each of us individually that we protect that which we create outside the context of

the business, so the default could not possibly be “all IP created by members is owned by the

company upon completion”, or anything similar. Additionally, signing IP into the company

would allow WP either to make money by selling original work by one or more members, or

inversely, to compensate a member for creating the necessary work should the circumstances call

for it.

Having written our Operating Agreement and hashed out the finer details, the time came

to form the business. Brad recommended looking directly at the UT Department of Commerce
 Giorgio 6

website, as regulations and requirements vary from state to state. We discovered that the first

step was to obtain an EIN, which could be completed through the IRS, and file a Certificate of

Organization with the State of Utah. As of the 2nd of April, we obtained our EIN through the

IRS website. Once I turn 18, I will be our Registered Agent and will go with the other two

members to the Utah Department of Commerce to file our organisation paperwork.