Week 4: Deal Basics + Business Models

posted Apr 25, 2012, 6:44 PM by Priya Nayar   [ updated Apr 25, 2012, 6:58 PM ]
This week, you will be directed to a PowerPoint presentation prepared by Paul Hardart, with whom I co-taught this course onsite last year, discussing business models as well as some additional information on overall business models in the film and video industry. Once you have reviewed the presentation and lecture, I'm sure that you will have questions. Head over to the discussion forum so that we can explore those questions.
There are almost as many business models as there are producers. For this week, I have included three Powerpoint presentations, one from Paul Hardart, who teaches this course onsite at The New School and is a former Hollywood producer, and one each from graduate programs in Australia and Great Britain. All three of them provide overviews and insight into feature film business models. In other words, how do films make money? How do you obtain financing? Where do you market? Here are links to two relevant articles from The New York TImes.

States Weigh Cuts in Subsidies for Hollywood - NYTimes.pdf 

With Studios Wary, Investors Come to Hollywood - NYTimes.pdf 

But not all of you are planning to make a feature film. Some are proposing web-based projects. Others are thinking about reality TV,or series, or even documentaries. So what do all of these have in common? How do we answer the important questions:
  • What kind of business structure should I use?
  • Where do I obtain financing and how?
  • Where and how do I market my project?

There are no simple answers to any of these questions,but we can find some starting points. So, with that caveat, here are some of my thoughts. Let's start with the first one, since that is, in some ways, the easiest to deal with.

You can, in fact,  produce a project using any business model you want. If you are wealthy, you can pay for it out of pocket as an individual. If you like to take risks, finance it on your Mastercard, again as an individual. Or write a check. There is no need to form a business entity to make a film or develop a website. But, most people don't do it that way. Why not? After all, if the project is a success, you get to keep all the profits? And your project IS going to be a success, right?

Well, yeah, that is true. If it makes a boatload of cash, you do get to keep it, but you have to share it with the government, at least in the US. Those profits are taxed at the individual tax rate, and you are limited in what you can deduct as an individual, so you will likely be handing a lot of it over to Uncle Sam and various other state and local tax authorities. So, unless you are feeling very generous, you will want to somehow limit your tax liability. Of course, you are the employer of record for the people who work for you, so there are all those employment and payroll taxes. Union P&W. Residuals for actors. And so on.

And speaking of liability, if something should not go according to plan - now or sometime in the future --  and, say, you are sued for copyright infringement, or someone has an accident on the job,or someone decides to go after you for defamation, or using their image without permissions, or using a trademark, or ruining their lawn, or spooking their pet. You get the picture. You are liable. Just you. And they can sue you for everything you own, or will own. Not a pretty picture in a litigious society. Especially now, with so many lawyers out of work looking for a payday.

So, for those and a host of other practical reasons, most producers create a business entity. There are a number of forms, some provide more protection than others, and all have their advantages and disadvantages. First of all, since producing is rarely an individual undertaking, you will probably have one or more producing partners. The simplest business forms are either sole proprietorships or partnerships. These are exactly what they say -- you own the thing outright or you and one or more partners have shares in it, generally equal. These are essentially the same as doing it yourself; the liabilities fall on the partners personally, and your assets are at risk. Income, if there is any, is allocated as individual income each year and taxed accordingly. It is not possible to bring in outside investors, only more partners, all of whom have equal claim on any profits. There are also limitations to deducting losses and other business related deductions. So, from a liability standpoint, there are not ideal. From a tax standpoint, ask your accountant.

There are models that allow the owners or shareholders to limit their liability (and sometimes tax) exposure. For our purposes, we will discuss two basic types of them, the LLC (Limited Liability Company)  and the corporation (Sub-S or C-Corp). I'm not going to go into all the details of each, but will simply paint a broad brush picture of these options. You should really discuss this with your lawyer and your accountant before making a decision. And, if you are planning to raise money with a public offering, you should also discuss this with an investment underwriter as well. a book on our recommended reading list, Thomas Crowell's The Pocket Lawyer for FIlmmakers provides more details for those of you who care to delve into this area.

In brief, both LLC and corporation provide a means for producers to shield their personal assets and limit their liability exposure to the assets of the business. This means that a creditor can't come and repossess your car and house if the film doesn't make money and they stand to lose their investment. It also means that you can't be sued by the irate homeowner whose lawn was torn up by the grip truck, etc. LLCs are like sole proprietorships and partnerships in that they are relatively easy to form, and can include other business entities as well as individuals.

According to the Wikipedia, which is relatively accureate in this case, an LLC 

is a hybrid business entity having certain characteristics of both a corporation and a partnership or sole proprietorship (depending on how many owners there are). An LLC, although a business entity, is a type ofunincorporated association and is not a corporation. The primary characteristic an LLC shares with a corporation is limited liability, and the primary characteristic it shares with a partnership is the availability of pass-throughincome taxation. It is often more flexible than a corporation, and it is well-suited for companies with a single owner.

Membership interests in LLCs and partnership interests are also afforded a significant level of protection through the charging order mechanism. The charging order limits the creditor of a debtor-partner or a debtor-member to the debtor’s share of distributions, without conferring on the creditor any voting or management rights. Limited liability company members may, in certain circumstances, also incur a personal liability in cases where distributions to members render the LLC insolvent.

The phrase "unless otherwise provided for in the operating agreement" (or its equivalent) is found throughout all existing LLC statutes and is responsible for the flexibility the members of the LLC have in deciding how their LLC will be governed (provided it does not go outside legal bounds). State statutes typically provide automatic or "default" rules for how an LLC will be governed unless the operating agreement provides otherwise. Similarly, the phrase "unless otherwise provided for in the by laws" is also found in all corporation law statutes but often refers only to a narrower range of matters.

For U.S. Federal income tax purposes, an LLC is treated by default as a pass-through entity. If there is only one member in the company, the LLC is treated as a "disregarded entity" for tax purposes, and an individual owner would report the LLC's income or loss on Schedule C of his or her individual tax return. The default tax status for LLCs with multiple members is as a partnership, which is required to report income and loss on IRS Form 1065. Under partnership tax treatment, each member of the LLC, as is the case for all partners of a partnership, annually receives a Form K-1 reporting the member's distributive share of the LLC's income or loss that is then reported on the member's individual income tax return.

An LLC with either single or multiple members may elect to be taxed as a corporation through the filing of IRS Form 8832.[5] After electing corporate tax status, an LLC may further elect to be treated as a regular C corporation (taxation of the entity's income prior to any dividends or distributions to the members and then taxation of the dividends or distributions once received as income by the members) or as an S corporation (entity level income and loss passes through to the members). Some commentators have recommended an LLC taxed as an S-corporation as the best possible small business structure. It combines the simplicity and flexibility of an LLC with the tax benefits of an S-corporation (self-employment tax savings).

That is a lot of information, but it provides a good overview of why LLCs are the form of choice for many production entities. They are simpler than a corporation and do not have as many reporting or governance requirements, yet they do provide a liability shield. The other advantage of any business entity is that it can be dissolved at any time. Most productions are established as a stand-alone LLC for the duration of the production, and are then dissolved after a period of time. Shares of any profits are distributed based on other agreements made with investors and the distributing entities. While an LLC is a US entity,  similar forms of business structure can be found elsewhere in the world.

A corporate structure provides another layer of protection, since, as Mitt Romney has so famously said, "...corporations are people, my friend." At least they are in the eyes of the law in most places. The advantage of a standard or C corporation is that stock can be issued, which makes it a good vehicle for involving outside investors. In general, a corporation is only liable to the extent of the assets of the corporation. Profits are taxed prior to distribution of dividends to shareholders, but there are many ways to shield profits, more deductions for business expenses, as well as more options for dealing with business losses. An S-corp is a corporate structure whose income is disributed to the shareholders and taxed at individual tax rates. Again, your choice of business form is something that should be made on the basis of discussions with your partners, lawyers, accountants, and investment underwriters if you choose to go that rate. Options may be more or less attractive depending on your state or country.

If you're planning to make a feature film or television show, you will also probably work with at least one other producing entities. Look at the opening titles of most feature films, or the closing titles of most television shows, and you will rarely see one company name.LLCs and corporations can enter into contracts with other entities just as individual can (see Romney above)

.Your choice of business model also determines your options in terms of raising money. In many cases, investors in an LLC cannot be passive; they have to be partners in the business. On the other hand, corporations can sell stock. There are strict laws about public offerings and the required documentation, including who is considered a qualified investor. Again, this is a quite specialized area and one that I an certainly not qualified to discus. Talk to a lawyer who is knowledgeable in this area.

There are other ways to obtain financial backing that are less onerous. You can, of course, get money from family and friends. You can borrow money from a bank. Use a credit card. Save. Companies that provide equipment and facilities will occasionally "invest" in projects if you are a known quantity, providing their services for participation in the back end. Cast and crew will work for "deferred" payment or a percentage. Product placement, in which companies will either pay (of you are known) or provide products if they are featured in the production. Some states still provide tax deferments or refunds (see article above). Outside of the US, there is often government participation in feature films and high visibility television projects through specific funding mechanisms.

For documentaries, there are grants as well as sponsorships. While it is beyond the scope of this course to go through all the potential grant providers, there are guides and organizations that provide that information. In most cases, the filmmaker will have to participate financially, as well as putting up "sweat equity" in the form of labor and sometimes facilities.

It is a little trickier with web-based projects, but there is a certain amount of venture capital available.

Television shows are a little different, since the network will put up a large percentage, but not necessarily all, of the cost of production. But, they rarely will do this for an unknown quantity. If they like the idea that you propose, they may want you to partner with a known producer. Or, you can try to present your idea to a producer with network connections, but you will often not be able to retain future rights. All networks have development executives whose job it is to keep their eyes out for possible new shows, so they will review your proposal. They are accessible. They may pass on the idea, but that doesn't mean that it is bad, just that it isn't a good fit for their programming mix. If you choose to go this route, study the network's programming carefully and submit only to those you feel ara good fit. Submission practices differ. DIscovery, for instance, has a web-based "Producer's Portal" for new and existing producers with a well documented, highly structured  submission procedure. Other networks are less formal.

We will look at the marketing aspect a little later in the semester, but, suffice it to say for now, that producers are being given inclreasing responsibility for following through on marketing, no matter what the form of the project.

ASSIGNMENTS: 

This week, you should continue working on the assignments from Week 3, the Beat Outline/Treatment which should be posted by 2/24 next week. Dossier groups have a little longer, but the dossiers should really be taking shape now. Look inside the folder for a suggested reading assignment and a new approach to writing your resume which I would like you to undertake.

  • Reading Assignment

    This assignment is optional, but strongly suggested. Last semester, we had a guest speaker who focused on the legal dimensions of producing. This is a very important area, since it covers how you can protect your intellectual property, your business, yourself, and avoid potential pitfalls that can cripple your production. Thomas Crowell, Esq of the law firm of Saperstein & Crowell was our guest speaker. In order to orient yourself to this presentation, we strongly recommend that you purchase (and review) his book entitled “The Pocket Lawyer for Filmmakers”, Focal Press. It is available online at Amazon or other sources as well as online from Showbiz Software or, for those of you who can make it into New York City, at The Showbiz Store & Café on 21st St between 5th and 6th Ave.

    This presentation was recorded and links will be available in the Lecture Notes section as well as the announcments. If you have questions, please post them to the discussin forum and we can hopefully shed some light on them.
  • Industry Dossier Projects

    This is actually the same assignment you were given last week. Consider this a reminder:

    By the end of week #7 (Friday March 9), all dossier teams should post a draft in which most of the categories have some input. The dossier should contain an organized collection of data in a rough draft form. It should be divided up to correspond to the template categories. If the members of a group agree that a particular category does not apply to their domain, the rationale for this decision should be stated. All data should be structured and organized into the appropriate categories and show evidence of research, including links to sources.  It is understood that the dossiers are a work in progress; I'm not expecting polished prose or tight editing, but must see some evidence that you have started moving forward with your research.

  • Skill-Based Resume

     (due 3/1)

    Please build what may be an unfamiliar form of resume that is organized around the skills groupings required for producing and doing creative works. This probably means you will be refocusing your current resume into a form that amps up the specific skills you have acquired via the work and study you've done to date

    The basic idea is to pull your skill sets out of their original context, to identify them as gained skills that can be applied to other projects.Of course you must determine those areas that represent both your strengths and also youraspirations.

    Remember that the goal here is to provide the person looking over your resume with specific, production-relevant skills that you already have.  We’re not necessarily talking about technical skills like camera assistant or software skills like After Effects, but rather sets of specific skills that you have that can be applied to the task at hand, immediately. Of course, if you’re an After Effects wizard, please make it clear.

    Examples:

    Instead of the usual "worked on" or "was PA" on a specific show or project, write:

    - Production:   booked crews, handled petty cash, logged footage, corralled releases, built schedule, developed contact and call sheets, etc.

    This tells the producer that you already know what to do and have the skills to handle the task at hand. You’re not a trainee.

    Instead of "created internet pages" be specific:

    Internet : html hand coding, Dreamweaver, Java, site architecture(flow-charts), design layout, page construction, image research & rights, usability testing, proofing

    Instead of "Researcher" tell us what kind of research you did:

    Research:   fact checking, locating consultants, stock footage research, cue sheets, data base   development.  It seems that "web scouring" is too generic. If you did online research, at least describe specifically what you were trying to find out and any specialized databases or sites that you used.

    This is not an exhaustive listing, but some suggested categories you might want to use:

    Production

    Directing  

    Creative

    Business & Finance (scheduling, budgeting, deal making)

    Software Development

    Administration

    Language

    Management (organizing, scheduling, travel, etc.)

    Production (functions done on set or location)

    Writing

    Directing

    Events Planning

    Booking Talent (aka "handling", "babysitting", "corralling" talent)

    Research

    Post-Production

    Animation

    Graphic Design

    Music

    Audio  (sound effects, mixes, location recording)

    Internet

    It’s always hard to figure out how to state one's level of competency/expertise in a specific production area (say, lighting or camera). The same is true for software & hardware. If you overstate your skills, it becomes painfully obvious really quickly. Here's how I recommend you "grade" the level of your competencies:

    - basic knowledge of ..... (introductory level)

    - proficiency within ..... (working knowledge, but not polished skill)

    - advanced knowledge of...... (professional level)

    We are not asking you to develop a full-up Skills Based Resume, although you are encouraged to do so. If you want to try out the full thing, my advice is to lead with the skills - put them front and center - and then to continue on with a more standard chronology of where you have worked along with the employment durations. Your resume should always cite names of specific productions you have worked on. I also recommend that you find a very quick way to characterize such jobs with a brief description, including a log line so that the reader will know what genre of show you worked on.

    Of course, different job opportunities will require you to custom tailor your resume, choosing those categories that show off your skills to the best advantage for the job you are after.

    YOU ARE WHO YOU ARE!  Don’t use a resume to mislead others (or yourself) about what it is you are best at and enjoy most. Resume padding is really obvious. I mean REALLY.

    Know how you learn; identify your professional values; try to determine where you belong in the professional world and to envision what your contributions will be.

    It is not easy to gain such knowledge. The first step is to cite expectations of yourself - write them down somewhere so you can come back and evaluate your progress.

    Pay attention to the design and layout of your resume. I recommend that you use a small type font, so that there can be clear headings and lots of white space.  Please limit this resume to 2 pages or less. 

    Please email me a copy of this new resume by the due date (3/1). I will get back to you with comments over the next couple of weeks, depending, of course, on my internet access situation.

Ċ
Priya Nayar,
Apr 25, 2012, 6:45 PM
Ċ
Priya Nayar,
Apr 25, 2012, 6:44 PM
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