Films as Startups: A Legal Guide for the Indie Filmmaker

By: Sammy Zand

The film industry is changing. We no longer see the days where writers shopped a script around Hollywood, hoping to catch the eye of a major production studio. Instead, that model has turned upside down. Films are aiming to captivate an audience first, without the assistance of studios. Technology and social media have made it feasible.

Instead of following a more traditional path of production, a writer may enter his feature-length script into a contest, or create a small teaser to get the premise of the film in front of a large audience. If the film is bought, it will then lead to a feature-length film. The teaser trailer acts like a short pilot that will reveal the numbers to potential investors and financiers up front.

Studios spend a tremendous amount of money in marketing the film, but independent filmmakers are now capable of distributing their content in even the smallest of budgets. Websites like Facebook, Kickstarter, and Twitter have changed the way films are now made.

For example, film director, actor, writer, and producer, Edward Burns has said that twitter has fundamentally changed the way he makes films. Thanks to social media, the independent film movement is in a renaissance. Burns created Newlyweds on a $9,000 movie budget in 12 days. Twitter helped Burns connect with people that really care about the work in the most effective way to get things seen. Since joining Twitter, Burns answers questions from fans, shares his filmmaking process and yes, uses his followers to promote his projects. While studios spend incredible amounts of money in raising awareness as to the digital and home availability of their films, Burns was able to accomplish that completely through Twitter.

Edward Burns is one of hundreds of independent filmmakers that have chosen this alternative route. Amazon and Netflix has made that even more possible. Last year, Amazon bought five independent films, including the Oscar-nominated film, Manchester by the Sea for a reported $10 million. Meanwhile, Netflix has picked up streaming rights for many other films and announced it will produce a slate of indie films. Technology is changing film production. More and more filmmakers are taking the independent film route.

For those that are beginning their “indie venture”, there are important legal issues that independent filmmakers must face. 3 major areas of concern are: business structure, crowdfunding, and intellectual property rights.

Business Structure

Just like any other business or when starting any new venture, the first question an entrepreneur faces is how to organize the business structure. The same goes for independent filmmakers when setting up a production company. The best choice of business structure will depend on the objectives of the filmmaker in balancing four considerations: control, financing, liability, and tax obligations. Often times, these four areas are in conflict. The filmmaker must determine the nature of the project early in its existence, because the planning choices may dictate some of the subsequent choices available to the filmmaker. But, business organizations can change as the situation evolves.

A Sole Proprietorship: Here, a single person is personally responsible for all aspects of a business. Unless the filmmaker works with a partner or adopts a more formal legal structure for his film company, he is considered a proprietor by default. A sole proprietor is never separate from its owner and all control stays with the business owner, including all liability like debts, promises, and obligations. Without a separate legal entity, there are few formalities. While the primary benefit is that of simplicity, the single biggest drawback is the personal liability the filmmaker takes. This model also does not accommodate fundraising. The filmmaker can take out personal loans, but the sole proprietorship is not suited for raising capital from third parties.

Corporations: An S or C Corp is managed by a board of directors, operated by its officers, and owned by its shareholders. The corporation provides the shareholders with limited liability for all acts conducted on behalf of the corporation and protect the officers, directors, and employees from many forms of personal liability. Yet one of the key features is separation of management from control. The shareholders (investors) control the corporation and operate by electing a board of directors. The board is then bound by operating rules established in the corporation’s bylaws. For many filmmakers, this complexity may seem extreme. But, most states (including MA), allow a single person to serve as the board of directors. Perhaps the biggest downside to operating a corporation is following the corporate formalities. An S Corp. can only have 75 stockholders or fewer, while the number of a C Corp.'s stockholders is unlimited, but the latter is subject to "double taxation" (first on the corporation, then on the individual level).

The LLC: For most independent filmmakers, a limited liability company is the best choice for forming a film production company. It can be taxed as either a corporation or a partnership, and its operating agreement is more flexible that corporate bylaws for structuring the film company’s operations. The personal liability shield is effectively the same as a corporation. Many filmmakers also hope to launch an ongoing film company with the hope of creating multiple projects but they need to keep investments of each film project separate in order to ensure that the profits from each film are distributed to the investors of a particular project. To accomplish both goals, a popular structure is to create one umbrella company formed as an LLC to be owned and operated by the production team or single film entrepreneur, and then that umbrella LLC will be the sole manager of a second LLC that is formed to finance, develop, and distribute a particular film. Investors of the movie are members of the second LLC. Nonetheless, a different structure may be preferred. It depends on the particular makeup of filmmakers and investors. For films that are heavily financed by outside investors, the traditional corporate form may be best. Investors can be often times reluctant to participate in an LLC, and may prefer a more traditional corporate structure to purchase shares that invest in an LLC.

Crowdfunding

Crowdfunding has become a popular choice for filmmakers who are unsure of the size of units they will need, or anticipate approaching a large swath of different investors. Each crowdfunding company has a different set of rules for fundraising, and, very often, you have to provide your contributors with "rewards" in exchange for their funding. Kickstarter is the most famous of these companies.

Kickstarter: projects must reach goal in order for project creator to receive funds. Kickstarter is free to sign up, 5% fee to funds raised, plus Amazon Payments processing fees.

Indiegogo: allows you to choose to get the funds earned for projects, whether or not the project reaches its goal. Indiegogo charges a 4% fee to funds if the project reaches its goal, 9% fee to funds if it does not, plus 3% credit card processing fee and $25 wire fee for non-US campaign.

RocketHub: is a lesser known crowdfunding site, but appealing for indie filmmakers. It allows you to get the monies raised for a project, even if you don't reach your goal. They charge a 4% fee to funds if the project reaches its goal, 8% fee to funds if it does not, plus 4% credit card processing fee. Side note: RocketHub has an affiliation with A&E Networks, which may be useful.

Intellectual Property Protection

Intellectual property rights refer to property rights over creations. This includes screenplays, motion pictures, sound recordings, and more. The types of intellectual property rights most important to independent filmmakers are those concerning copyright, which gives the copyright owner the rights to reproduce, adapt, arrange, perform, display, distribute, or sell copies of the work. Gaining a copyright over a screenplay is simple. It only requires that the idea be in a tangible form. Writing it into a screenplay will suffice. However, unless it is registered with the US Copyright Office, a lawsuit for damages in the event of infringement cannot be brought. Filmmakers should also be certain not only to protect their own work, but also to make sure they are not infringing on the copyright of others as they begin a project.