If you are a self-employed creative and start to sign contracts with entertainment / publishing companies, you’ve probably heard about “loan-out” companies and the advantages of owning one. Indeed, a loan-out company or corporation could shield you from many liabilities, bring tax benefits and serve as your personal IP house.
Please allow me to explain.
The most common entity of a loan-out company is an S Corporation owned by an artist, where the artist is both the shareholder and an employee of the corporation. With this structure, artist's liabilities are limited within a shareholder’s liabilities, rather than being fully personally liable for potential damages claimed from breach of contract or infringement.
Following the Tax Cuts and Jobs Act of 2017, it is difficult for a freelancer to deduct taxes for all business expenses in personal income tax returns. Thankfully, you can still deduct the related expenses using a loan-out company. However, a loan-out company also incur some costs on social security and other maintenance.
How to use a loan-out company as your personal IP house?
The basic structure is that the loan-out company would own your creative work and sign all contracts with third parties for the work. You should also have an employee agreement with your loan-out company to specify the ownership of IP, usually the work is specified as “works made for hire” so that the loan-out company would be the IP owner of all your work.
Depending on the deal, your company can either retain the IP and sell a license of it, or sell the IP altogether to the contracting party. If you can keep your IP, congratulations, that usually means you are keeping something of growing value. Your loan-out company can receive payments and grant exclusive or nonexclusive licenses to the contracting party. If you sell your IP to the contracting party, the work will also be “works made for hire” between your loan-out company and the third party.
Most third parties would want to make sure that the work is delivered by the named artist, so I usually put that in the employee contract as well. I also recommend all contracts to be updated to include virtual goods in the scope of IP right.
How to register a loan-out company?
Depending on the specific state, it usually involves steps of selecting an available name, electronic filing with the Secretary of State, publishing company information with a local newspaper with another government filing, followed by annual maintenance filings. With the first filing receipt, you can apply for a Tax ID, which you can use to open a business bank account.
We provide legal consultation for the above.
Sincerely yours,
Silvia Sun, Esq.
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