Planning the LLC Operating Agreement for Film Production to Protect Your Film
Forming an LLC is nothing new for film producers with interest in advancing the production of a feature film. The LLC provides certain protections for producers limiting their liability while keeping investments and other funds separated from other projects. Protection is essential in planning an LLC operating agreement for film production. Which is why it’s important to take your time and outline a list of key considerations to discuss with your entertainment attorney. Before the business is formally compromised. With the right essential planning steps, you can assure crucial investors that you’ve done your part to limit liability and protect their investments into your business.
Before you meet with your production attorney to discuss the LLC for your film it’s important to sit down. And begin considering all of the important details that will be included in the formal initiation of the LLC operating agreement for your film production.
Much like a business plan, you’ll need to consider all of the following.
Membership Structure
This is very important as each member of your business will have certain rights in regards to voting, distributions, and things like profits or other details. Generally, the “Director” of an LLC is going to be the “Manager” and then “Shareholders” are “members.”
An LLC, by default, will have units of ownership similar to shares of stock. You’ll have to decide how much or how many “units” of membership interest each of the members of your structure have.
You should also be thinking about:
- Who has the right to vote? And who will not have voting rights?
- Who is under obligation to invest more upfront? Who is not?
- What is the distribution priority before any deferred compensation that is to be paid out?
Purpose & Duration
The next consideration is the purpose of your LLC operating agreement for film production and the duration of the business. Generally, an LLC is formed for the purpose of some form of a lawful business activity.
In this case it might be to produce and distribute a feature film. It’s important to mention “any lawful business” so as not to limit the purpose of the LLC formation and to allow a broad scope upon which the business may grow.
When it comes to the duration of the business, most form the operating agreement to state that the LLC will remain in effect until otherwise dissolved.
However, it’s important to consider the following:
- Will you keep the LLC for a certain fixed period of time past production?
- Will there be any automatic renewals of the business after a certain time?
- Under what circumstance will the LLC dissolve?
Liquidation
In the event that a dissolution occurs, it’s important to specify in the operating agreement how the decision will come about. Will a liquidator be appointed? What will the final accounting procedures be regarding the sale of assets or distribution to members?
Additional considerations with dissolution include:
- What priorities are for distribution?
- Whether to include creditors.
- Will the certificate of formation be cancelled to fully dissolve the business?
Capital Contributions & Capital Accounts
Planning for capital contributions is incredibly important, after all this is one of the key areas of consideration and the reasons for producing an LLC. Some contributions will be cash, but how will such contributions be handled by the business?
The LLC operating agreement for film production must not only dictate how they will handle capital contributions. But if they are not allowed should specify so ahead of time.
Consider spelling out the procedures in use when seeking capital contributions. And what will happen if any member does not make the desired contribution within the desired timeframe.
Without planning the procedure for this you’ll run the risk of serious challenges in the future which could disrupt or otherwise jeopardize your business.
Intellectual Capital
Don’t forget to consider the contributions of intellectual capital. Such as screenwriting and other services. If one of your members is a screenwriter, they may provide intellectual capital and therefore need to submit a smaller cash contribution or perhaps none at all?
The LLC operating agreement should also dictate what will happen with capital accounts. Generally, the agreement will state that interest will not be paid out to capital accounts and should also specify that members are not entitled to any returns on their capital account.
But if these details are not clear in your operating agreement there could be challenges in setting forth the rules in the future.
Don’t forget to include any mandatory tax laws and provisions. You might want to consult with a tax expert in order to ensure that you’re covering all the right bases.
Distributions
It’s important to plan out how you will handle any distributions that are to be made in the future. Will distributions be open-ended? What is the process for coming to an agreement for distributions? Will all members have to agree or will it be a majority rule?
Consider the initiation of mandatory quarterly distributions. As well as whether or not members could pay tax liabilities with quarterly estimates. Again, you must abide by all tax laws. Therefore, you’ll want to talk with an expert.
Managing the Business
The entire purpose of forming an LLC operating agreement for film production is to outline the terms and conditions of the business operations and how the production company will operate. Managers are generally elected ahead of the formation.
They are often members of the business. And will frequently have backgrounds which can be supportive of the business in various capacities.
The operation agreement should detail who will manage the business, when, where and how frequently meetings will take place. How meeting minutes will be recorded and what action will come about from meetings.
Ask Questions
If a committee or multiple committees will form as a part of the business, these details are also necessary. What powers will a committee have, who will they represent, and how will committee members be appointed.
Detail issues that business managers will handle. Who are those managers and how are they elected? What will the manager’s term be and how will a manager be relieved of their duties if they perform in a way other than is acceptable by the business?
The same for officers. Who are the officers of the business? And how are they chosen? What will they handle and why? Who will they report to and will they be compensated for their roles?
Transfer of Membership Interest
Finally, the LLC operating agreement for film production should address how membership interest in the business can be transferred. Is the transfer of membership allowed? Are all managers able to transfer their rights?
Or are rights transfers something that will be available only for members after a vote or some other action? This is a good time also to consider what documentation is necessary. As well as what rights a transferee will have when they become members of the business.
As you can see, planning the LLC operating agreement for film production is a long and endearing process that is certainly going to require you to work closely with an attorney.
However, the sooner you begin to think about these internal decisions and the guiding activities that will be involved in the running of the business, the more prepared you will be when the time comes to seal the deal.
