The Advantages of Starting a Loan-Out Company for Musicians
Most professional musicians, artists, and other performers use a “Loan-Out Company” to provide their skills. Nonetheless, I’ve encountered a lot of misunderstandings among these same experts about why they started a Loan-Out Company in the first place and whether or not starting a Loan-Out Company is even a good idea in their situation. For Music loan companies that need a loans try https://acfa-cashflow.com/ and apply online.
What is a Loan-Out Company, and how does it work?
A Loan-Out Company is a separate legal company (such as a corporation or LLC) formed to ” lend out” the services of its owner/employee to third parties. For example, a musician’s Loan-Out Company “lends out” their services (recording, production, and live performance) by engaging in contracts with the end-users of those services, such as a record label, a music publishing company, or a concert venue.
To give you an example, if you wanted Drake to perform at your birthday celebration, you would most likely hire Drake’s Loan-Out Company rather than Drake directly. You would then write a check to Drake’s Loan-Out Corporate, put it in the company bank account, and the Loan-Out Company would then pay Drake his fee.
The Advantages of a Loan Out Company
A Loan-Out Company is only worth considering for most entertainers once they have regularly generated a specific level of money. A typical required threshold is $75,000-$100,000 in annual income. At that stage, the advantages might be rather great, with the following being the most important:
Tax Benefits
A Loan-Out Company might be able to save money on taxes that a musician wouldn’t be able to get if he or she didn’t have one. To begin with, Loan-Out Companies are an excellent approach to lower tax liability. Individuals cannot deduct expenses from their income computations; however, businesses can. Individuals can take advantage of numerous deductions, such as the “home office deduction,” but they are only partial write-offs, allowing you to deduct only a percentage of your taxable income.
There may be benefits to having the Loan-Out Company pay the principal a steady salary rather than merely transferring any money via the company, but that is a math question that is special to your situation.
Asset Security
Because the Loan-Out Company is a separate legal organization, property owned by its owners cannot be utilized to settle the company’s debts or to fulfill a judgment against it.
That implies that if someone sues your firm, no one will be able to seize your assets as a result.
Consider the following scenario:
- Your business has $5,000 in its account.
- Its owner has $10,000 in his personal bank account.
- The business is sued for $10,000 and loses.
If the $5,000 is the company’s only asset, the winner of the lawsuit cannot pursue the owner for the remaining $5,000 owed to the company.
A Loan-Out Company’s Potential Drawbacks
While there may be major benefits to incorporating a Loan-Out Company, there are additional costs and expenses connected with forming and managing a company structure and significant tax penalties if done incorrectly.
Workers’ Compensation
Even if they are utilizing a “Loan Out Corporation,” the individual must ensure that they are covered for Worker’s Compensation insurance by the production company. They will have no medical care if injured on set. It’s possible that SAG Medical Insurance won’t cover it.
These fees, combined with the added costs of engaging a bookkeeper and accountant to complete quarterly payroll tax returns and corporate tax filings, could end up costing more than any tax savings gained from expense deductibility. It isn’t really worth it for someone who earns less than $200,000. Then there’s the 1099 reporting obligations and possible penalties.
The IRS may disregard the entity or reallocate income to another entity.
The IRS opposes the use of Loan-Out Companies only to avoid paying taxes. As a result, if the company isn’t properly recorded and used regularly, the IRS may conclude that a Loan-Out Company is nothing more than a tax evasion technique and disregard it for tax purposes.
You may be charged a higher personal tax rate despite paying the various costs and expenses associated with founding your Loan-Out Company.
The IRS has the right to reallocate income between taxpayers who have joint ownership and control if it believes it is necessary to prevent tax evasion. This usually happens after the artist’s services contracts have been signed and the firm has been founded. As a result, one should organize one before entering into a contract on behalf of a Loan-Out Company.
Yearly Operating Expenses
A Loan-Out Company must also maintain its status by completing annual reports and paying taxes to the state in which it was created and possibly additional states where it operates. A Delaware LLC whose owner is an artist with houses in New York and California, where they deliver practically all of their services, will be needed to “qualify” in both of those states. That means the artist will have to pay fees to register in both New York and California and pay taxes to both states based on the money earned in each.
Unemployment insurance is an expenditure that many younger artists overlook, but it may be important if you become injured and are unable to give services and create cash. You’ll need to pay yourself a fair salary to keep unemployment insurance, including setting aside a percentage of your earnings but with the usual withholdings and deductions.
Business Entity Formation/Maintenance Fees
The process of founding a Loan-Out Company is similar to that of forming any other LLC or company. It all starts with the state filing of the company’s Articles of Organization, the cost of which varies by state. The state filing charge to incorporate an LLC in New York, for example, is $200 plus attorney’s expenses. In addition, state minimum taxes ($800 in California) and other small filing fees may be required within a few months of the company’s formation.
Is it possible that I’ll work for a loan-out company in the future?
As previously stated, a correctly constructed Loan-Out Company can give significant tax and other benefits; nevertheless, without effective planning and administration, business issues and added costs can outweigh the potential benefits. Many businesses hire a bookkeeper to ensure correct accounting, but before making any decisions, you should contact your tax advisor and an expert entertainment lawyer.
How Do I Start a Loan-Out Business?
Founding a Loan-Out Company is similar to forming a regular corporation or LLC.
State filing requirements include filing articles of organization with the state, preparing operational papers (Bylaws, Operating Agreement, etc. ), issuing shares or interests, and acquiring a Tax ID number.
Drake and his Loan-Out Firm must nevertheless engage into a proper, legal agreement to address how any money would move between the company and its principle, even though Drake owns 100% of the company. There may be tax benefits to the principal taking a constant, lesser pay rather than having any money pass through to the owner/employee right away, but you should speak with a tax professional before choosing which structure best suits your individual circumstances.
Prospective employers will now hire the Loan-Out Company rather than the individual.
However, most hiring parties will demand the principal to sign a “inducement” agreement personally.
This is usually a clause placed onto the end of a contract that specifies that if the Loan-Out Company goes out of business, the individual will continue to deliver the agreed-upon services.
Drake is unlikely to sign an incentive, but non-superstars could expect to be held to this standard.
