The actor faces the difficult issue of how to balance her artistic activities, with business and legal issues that may arise in the collaborative nature of the theater. Any actor given the choice, would rather take a class in movement, voice, or scene study, than in performing artist tax preparation, especially if she only has money to pay for one class. And this makes sense, because the artist must have something artistic to share or sell. Without that artistic commodity, no business or legal issues will ever arise, because there will not be any creative work to deal with. One can argue that all professionals face the same struggle; how to keep current with information and skills, versus devoting time to business and legal issues that spring from their work. The difference is that most other professions can support the practitioner financially, so the actor usually has the extra burden of a “survival” or “day” job until they are established in show business.

 Another interesting difference between acting and other professions is the average amount of rejection the actor endures as part of a normal career. The foreword of the book Smart Actors, Foolish Choices (1) addresses briefly the difficulties actors face pursuing their craft. The foreword describes the feelings of failure and lack of control that even successful actors such as Mercedes Reuhl and Anthony Hopkins have experienced at one time or another in their careers. One entire chapter of the book is devoted to dealing with rejection. This rejection will often cause actors to lose self esteem, which can unfortunately prevent them from functioning as actors, as well as business people preserving their best interests. The actor also faces the stereotypical evaluation that because she is  an actor, she is not dependable, or capable of understanding business and legal matters. Basic business practices such as keeping records of expenses, professional contacts, audition results, mailings, and self promotion are outlined in several books (2), but the books never go farther than the basics that most business people would find hysterically elementary, and yet to actors, who have not been exposed to such ordinary buisness and sales practices, they are great discoveries of how to function in a business capacity.

 This lack of business skill seems to be perpetuated in acting schools, and programs across the country. Categorically, even the most rudimentary marketing practices for the actor are not included in the curriculum. The most the University of Iowa Theater Department does for the undergraduates is invite a theater or film professional occasionally to discuss their work, and inevitably the students ask marketing and business questions. The U of I Theater Department, in response to the MFA Actors request, has held a few short classes that deal with business aspects such as headshots, and marketing. The U of I does nothing to prepare their undergraduates for the business aspects of the performing arts. Few, if any people who studied acting at an accredited, academic institution say they were well prepared for the business aspects and grueling number of auditions one needs to deal with to succeed in the field. The twelve interviews at the end of  Smart Actors, Foolish Choices (see note 1) support this observation.

 Part of the prejudice against the instruction of business issues in acting programs comes from the disrespect for those artists who “sell out”; actors that do commercials or soap operas, playwrights that begin screenwriting, contrasted with the immense respect garnered for those artists who “starve for their art” (ironically, like those artists portrayed in the commercially successful musical “Rent”). Academic theater institutions do not always give the budding artist the tools with which to balance commercial success and artistic merit in the formulation of their future plans. Artists such as Julie Taymore (director of Disney’s musical “Lion King”), Jodie Foster (Academy Award winning actor turned director and producer), and Emma Thompson (Academy Award winning actor and writer) prove that commercial success and artistic merit are not always mutually exclusive. It is a highly personal choice. Perhaps it is best that institutions devoted to training and nurturing artists do not spend much time on the details of business pursuits, as the artists will have plenty of time to deal with business aspects later, and less time available for creative exploration of their craft. Regardless of that sentimental desire, the fact remains that the actor who is at least briefly prepared for the business realities will fare much better than the one who is cruelly surprised.

 The income and employment statistics the unions keep show the antithesis of the Variety and Hollywood Reporter headlines that boast how many millions of dollars star actors negotiate in theater and film. “In fact, the sad truth of the matter is that the vast majority of the members of the three major talent unions (the Directors Guild, the Writers Guild of America, and the Screen Actors Guild) cannot earn a living in the film business. For example, perhaps as many as two-thirds of the members of SAG earn less than $1,000 a year from acting in films.” (3) From the Actors Equity Association (AEA - the stage actors union) website (4) one sees that approximately 5,000 of the 35,000 members in good standing are working on about 500 professional stages in the United States. In one year approximately 45% of the total membership in good standing has worked at least one contract. In 1997, $225 million was earned by all members under contracts. Simple division shows that this comes out to an average of $6,428 per member in good standing. From the SAG website (5) one sees that in 1996 more than 80% of SAG’s 90,000 members earned less than $5,000.  Meanwhile, Bruce Willis received $5 million dollars for his first feature film role in Die Hard, and Demi Moore was offered $12 million dollars for the movie Striptease (6), both of which make the acting student revisit the artistic merit versus commercial success conundrum.

 McQuown (8) states that “The real benefits [of incorporation] start at around $30,000 a year.” Most actors need never deal with the added paperwork and expense of incorporating properly. For the actor who wishes to write and produce her own work, create a not-for-profit theater company, or perhaps even produce a film one day, other issues such as liability, personal assets protection, and grant eligibility become issues that may be dealt with via incorporation. The rest of the paper is geared towards that type of actor, and those goals.

 The law recognizes a corporation much like it does a person. The law treats corporations as separate legal identity from the persons or entities which comprise and found it. The corporation has Constitutional protections like a person does, against unreasonable searches and seizures, deprivation of liberty and property without due process of the law, and denial of equal protection under the law (9). A corporation is not a citizen in the sense of being a human being, but it is considered a “resident” of the state(s) where it was incorporated, and where it does its principal business. If a corporation is incorporated in California, and does business in New York, it is considered a resident of California, and a foreign corporation in New York. A corporation can have two “domiciles” - the state where it was incorporated, and  the state where it has it’s principal place of business (9).

 A corporation is comprised of shareholders, investors who have put up money or other assets in exchange for a percentage of ownership of the corporation. Every corporation must have a board of directors who are responsible for the operation of the corporation, and deciding matters that affect the entire corporation. A corporation is a way of legally protecting personal property and assets when entering into a potentially risky activity (such as running a theater company or producing a film).

 “The most important characteristic of a corporation is the “limited liability” it affords shareholders (or members), directors, and officers for wrongs committed by the corporation. In the case of a business or a “for profit” corporation, a shareholder’s liability is usually limited to the amount he or she invested in the corporation. If a corporation goes bankrupt, stockholders are not liable for the corporation’s debt.”  (10)

Lest that send the reader into incorporation for the wrong reasons, it must be mentioned here briefly that if a corporation is set up to commit fraud, or evade the law, the courts will “pierce the corporate veil” and “look directly to its shareholders or directors and officers for liability for corporate debts and responsibility for corporate misdeeds.” (11)  Consciencious, accurate, record keeping is vital to any form of corporation. The written record must  prove that the corporation is an entirely separate entity from those who operate it. The written record must show proof of the independence of corporate finances, and proof that the corporate board of directors has had the requisite number of meetings, and that the meeting minutes have been properly filed. Improper, innacurate corporation records erode the limited liability protection.

 A corporation can exist longer in time than it’s founders. It can exist for an unlimited amount of time, unless the board of directors do not dissolve it, or it’s founding Articles of Incorporation specify a termination date (12).Although a corporation can exist indefinitely, it is common practice in the film industry to set up a corporation for each film project. Jodie Foster, who founded Egg Productions, Inc., to develop film projects that interest her, produced Home for the Holidays under Go Home, Inc., and Little Man Tate, under Little Man, Inc. (7, 13) This way, her personal property and assets are protected in the event of a law suit, and the earnings of one film are separated from another by use of different corporations. Debt and any liability of a second film do not affect the earnings of the first. Creative issues can be renegotiated or redefined for each contracted  entity.

 One of the first people to form a one person corporation, was an actor by the name of Charles Laughton (14). He portrayed Henry VIII in The Private Life of Henry VIII, and Captain Bligh in Mutiny on the Bounty, as well as many more film roles for MGM in the 1930s. Charles Laughton was quite successful and formed a corporation for the purpose of controlling his income tax and developing film projects that would feature his work (Charles Laughton vs. Commissioner of Internal Revenue, 40 US Board of Tax Appeals Reports 101; and Commissioner of Internal Revenue v. Laughton 113 F.2nd 103). His corporation had a board of directors, and gave him a set weekly income, for which he signed an exclusive services contract with the company Motion Picture and Theatrical Industries, Ltd. (Industries, Ltd.), incorporated and organized under English laws. Mr. Laughton was under contract to MGM in 1932. In 1934, MGM and Industries, Ltd. entered into a contract regarding Mr. Laughton’s appearance in MGM films. Industries, Ltd., in 1934 entered into a contract with Paramount concerning Mr. Laughton’s acting services, and Mr. Laughton and Paramount canceled a contract they had made in 1933. The courts found that Mr. Laughton had a legitimate corporation, because the corporation had a board of directors (which he did not belong to) whose purpose was creating films, and making decisions that led to the accumulation of capital necessary for those projects. The corporation gave Mr. Laughton a salary agreed to in his contract with Industries Ltd., and Industries Ltd. had a written record of contract dealings with MGM and Paramount. The IRS wanted to prove that Mr. Laughton earned the income, therefore it should be taxed as personal income, but the facts showed that the corporation had earned the income, and Mr. Laughton had to pay tax only on the salary he received from Industries, Ltd.. In order to raise capital, part of Mr. Laughton’s agreement with Industries, Ltd. involved giving them his percentage of gross receipts from The Private Life of Henry the VIII,  and sole rights to his acting services. In exchange he got a fixed salary for five years. He had all the contracts, and separation of assets to prove this business relationship, and the court held that the income earned under the studio agreements did not constitute personal income for Mr. Laughton, therefore, the IRS could not tax it as such.

 A corporation must have a purpose, which is filed in the Articles of Incorporation (15). The performer must clearly express in writing the purpose for their business venture. Making money is not the only item that needs to be included. Any other considerations, such as developing theater or film projects of a certain nature (i.e.. promoting Latino issues), showcasing specific talent (acting, writing), or any kind of public service (providing live theater to migrant communities) should also be spelled out for potential investors to see. Once in business, the corporation will be held to this purpose, and possibly judged in tax court according tothe fulfillment of the purpose. This is to ensure that a corporation is not just set up for tax evasion, or redirecting business loss into more profitable areas that would benefit from a tax break.

  The case of Victor Borges and Danica Enterprises is a humorous illustration of how not to combine business interests and the consequences of not fulfilling a corporate purpose(16). Mr. Borges was a professional entertainer who made large sums of money from appearances in film, television, and stage. He also had a poultry business, Danica Enterprises, which operated at a loss. He entered into a contract with Danica Enterprises, under which he would perform entertainment and promotional services, and in exchange he would receive a salary of $50,000 per year for five years. Danica offset the rock Cornish hen losses against the entertainment profits. Danica had nothing to do with the entertainment business, and did not promote Mr. Borge, or provide him with performance opportunities. There was no way that this contract could plausibly exist between an entertainer and a poultry farm in a normally operating business relationship. The case record reflects that Danica only paid Borge once. “When two or more organizations, trades, or businesses, whether or not controlled by the same interests [ the IRS code, 26 U.S.C. sect. 482] authorizes the Commissioner [IRS] to apportion gross income between or among such organizations [...] if he deems that apportionment is necessary clearly to reflect income or to prevent evasion of tax.” (16) The lesson here is that if one incorporates as a theatrical or film company, one cannot combine it with unrelated business purposes solely for tax advantages.

 One of the important considerations for an artist in incorporating is how will the corporation do business. There must be clear indication in contracts that the income is earned by the corporation and its business dealings. There must be sufficient separation of decision making to persuade a tax court that the income is corporate, and not personal. In other words, if one coproration hires another, they must both be able to make such decisions independently, and not be controlled by the same person(s). The validity of the transactions may come under attack. The decision in Rubin vs. Commissioner (17), although not involving performing artists per se, is relevant for someone thinking of casting herself in her own projects. The opinion in the case quotes from another case, Hogle v. Commissioner:

 “The distinction in these cases is grounded on the question of who has the ultimate direction and control over the earning of this compensation. If such control lies with the taxpayer who actually performs the services, then he remains taxable on the earnings from his personal services, whether or not he chooses to divert the receipt of that compensation to a third party.” (18)

General Requirements for Incorporation
 
In order to incorporate legally one must file what are called Articles of Incorporation. They vary from state to state, but the basic format is outlined here. Again, most of the information has been taken from Diamond, an excellent source of information on the subject.  The First Article to be filed contains the name of the corporation, and the name must include the type of corporation (ex: corporation, company, limited, LLC). The Second Article must declare how long the corporation is to remain in existence. The Third Article states the purpose for which the corporation is being organized. The Fourth Article describes stock issuing, how many, what type of stock, cost of stock. Stock represents ownership of a corporation, and the stock owners basically own a fraction of the corporation proportional to the amount of stock they purchased. The corporation raises money in this manner at the beginning of the business process. The Fifth Article describes the classes of shares. If not specified otherwise, all shares will be considered equal, which affects the distribution of power in the corporation. The Sixth Article deals with the classes of stock, and issuing them in series. Certain classes of  stocks will carry different dividend rates, liquidation preferences, redemptive privileges, etc. The Seventh Article deals with preemptive rights, a shareholder’s privilege to buy a specified percentage of any new stock in the same class. Only when the shareholder turns down the privilege to buy this percentage can it be offered to another investor. The Eighth Article deals will special provisions, having to do with voting, shareholder and director meetings, filling vacancies on the board, and other unique internal features of the corporation. This also includes any indemnification of the corporation’s directors and agents from any liability that may arise as a result of performing their corporate duties. The Ninth Article provides the name and address of the registered agent and office. A registered agent and office must be maintained in the state of incorporation. This agent serves to communicate official correspondence between the corporation and the state. The tenth Article establishes the structure of the  initial board of directors. The Eleventh Article identifies the incorporators. The incorporators can be other corporations, and do not necessarily have to be residents of the state of incorporation. The incorporators are responsible for all the Articles. Unless they appear in other articles as having key responsibilities, the incorporators are only responsible for the proper formation and registration of the corporation.

 Bylaws are not filed with any agency. They deal with internal affairs. The Bylaws should be consistent with state laws, and the filed Articles of Incorporation. The board of directors have authority to amend or repeal Bylaws, unless the Articles of Incorporation say otherwise (for instance giving that power to shareholders). These Bylaws cover voting, quorum requirements, directors and their power, meetings, officers, board members, their compensation, responsibilities, financial matters and more. These matters are decided by each corporation. One begins to see the record keeping and paperwork filing needed in a corporation, and how that could potentially try the patience of artistic collaborators. These filing requirements make the partnership options more attractive by comparison.

Business Organizations

 There are various types of business organizations. Among them are corporations. Most of the corporate structure explanation is taken from Diamond (cited previously, 9 -12, 15) unless otherwise noted.  All corporations must file certain Articles of Incorporation in order to legally exist. Several business organizations discussed below have minimal filing requirements.

 Sole Proprietorships

 A sole proprietorship is a one-owner form of business organization. There may be other employees, but the business is owned by one individual, who need not file any additional papers or forms regarding incorporation, but must file annual reports, and tax documents pertaining to Sole Proprietorships (IRS form 1040 and Schedule C). Because of its simplicity, it is a common form of doing business. The proprietor receives all the profits, makes all the decisions unencumbered a board of directors, and also is responsible for all losses and liabilities incurred by the business.  If the proprietorship is sold, all the responsibility and liability is transferred. Because of the personal liability issue, this alternative may not be attractive to most artists who want to start their own film or theatrical production company.

 General Partnership

 Ahe general partnership involves two or more people. All partners have a say in the operations and decision making of the business, although they may delegate executive power to only one or two partners actually run the business. No organizational documents are required for state approval. Because more people are involved in this form of organization, a partnership agreement (a contract) stating the intentions, expectations, and agreements between the people is desireable and normally used (though not legally required). The partners areindividually taxed for their personal share of the profits. Each can deduct from their share of the profits their share of the business losses from their income taxes.  This is documented with IRS form 1065.The partnership gives each partner a K1 form, used to complete each partner’s IRS 1040 form. If one partner leaves, the general partnership “dissolves,”and a new one must be formed if the remaining partners wish to continue. General partnerships are never nonprofit companies. A general partnership will not be as attractive to those who wish to pursue such risky enterprises such as film or theatrical production because of the personal liability of the partners.

 Limited Partnership

 According to Siegel (21) the limited partnership is the most frequently used business organization for legitimate stage productions.

 “The basic structure of the theatrical New York Limited Partnership comprises two types of partners. The general partners - the producers of the play  - have sole control over the management of the business of the partnership, and are subject to general liability.  The limited partners - investors who contribute to the capitalization of the partnership - have limited liability to the extent of their financial contribution to the partnership [...] and do not participate in the business of the partnership.”(19)

 “In fact, the financing and development process for new commercial theater productions most closely resembles that used for films [...] Once an option [to a play or literary property] is acquire, a producer sometimes seeks financing by approaching prospective individual investors known as angels. Angels must indeed love theater because tax sheltering is much more effective in oil, real estate,  and professional sports franchises than on Broadway, where opportunities for depreciation are limited. As such, them an angel must also have enough income t afford a tax loss (write-off) because, historically, the odds against ever seeing a return on investments are well over 2 to 1.” (19a)

A limited partnership  facilitates the organization of a perfect match between those who have ideas for theatrical productions, and potential investors who have money necessary for realizing the ideas.

 Limited Liability Companies (LLCs)

 Strictly speaking LLCs are not corporations (20). LLCs combine aspects of limited partnerships with aspects of a corporation. The founders of the LLC determine its corporate qualities. The LLC offers partnerships with the protection of limited liability. A minimum of 2 people is required to establish this type of corporation. A Certificate of Formation or Articles of Organization must be filed (21) with a state. The Articles of Organization are basic; they must contain the name of the corporation (which includes the LLC), a registered agent and registered office. They must reside in the state where the company was incorporated. The Articles must include the number of members, the duration of the company (example: it can expire with a specific event, the consent of all members, or on a specific date), the purpose of the corporation, and other considerations such as admission of new members, specific financial matters, or rules of internal organization.

 “The Operating Agreement may be the single most important document in the formation and operation of an LLC. It is very much like a partnership agreement in that it is a contract between the members in relation to their rights and responsibilities in the operation of the LLC. It is also very much like the bylaws of a corporation in relation to the operating procedures of the LLC.” (22)

 Limited liability is part of the LLC organizational structure.  Judging from Diamond (cited everywhere in this section of the paper), centralized management essentially means not all the members participate in the operations and decision making of the corporation. But Diamond goes on to say that the regulations (IRS regulation 301.7701-2(c)(1)) create some confusion. The LLC must have a Manager, whose responsibilities are spelled out in the Operating Agreement. The Operating Agreement has profound tax consequences for the LLC , because this form of organization has more variability than other forms of  incorporation.

 “Free transferability of interests” means that a member of the LLC can transfer his or her interest in the corporation at will, regardless of the opinions of other members. This is a corporation-like characteristic. This is not conducive to partnerships that depend on specific individuals often found in artistic ventures. So much of theater and film production depends on the chemistry between the collaborators, that to substitute another person without any approval or acceptance on the part of the other members may be an extremely objectionable provision. It is up to the members to either form the rest of the Operating Agreement in a strongly corporate manner to counteract this provision, or decide to take the risk this free transferability implies, if the corporate tax status is sufficiently important.

 Corporate “continuity of life” is best explained by Diamond: “The real issue of the IRS is whether the addition or removal of a member will terminate the legal existence  of the organization.  With a corporation, a separate legal entity whose existence is not tied to the identity of its shareholders, the coming or going of shareholders does not effect its continuity.” (p.136) This could potentially threaten the delicate balance of collaborators in an artistic venture. The reader then sees what justifies the following observation :

 “The verdict is not yet in as to whether limited liability companies will replace limited partnerships in the theatrical business. It would appear that limited liability companies would be advantageous in place of general partnerships or joint ventures, since limited liability can be secured without the expense or trouble of setting up and maintaining new corporations to participate in a particular project.  In the realm of theatrical financing, however there appears to be a slight advantage to using limited partnerships. The current thinking is that, by using corporate general partners of a limited partnership, the element of limited liability can be maintained within the context of a limited partnership, while nevertheless avoiding both the additional expense of a limited liability company and the dangers of breaking new ground, since theatrical investors are accustomed to limited partnerships” (24)

 “Although financing is occasionally in the form of sale of stock in a corporation organized for production of a play, it may further be in the form of a large development interest that is granted by film studios in return for eventual, and perhaps strategically valuable movie rights. Of course, Broadway’s major theater owners - essentially the Shubert Organization, the Nederlander Organization, and Jujamcyn Theaters - might also take a piece of the action. But, more typically, an offering prospectus describing anticipated running and start-up costs of a show is circulated to interested individual investors. Such investors are offered, in return for their capital, a share of potential profits (usually half of any profits earned by the production) through a limited partnership or, since 1994, a limited liability company (LLC) arrangement.” (25a)

 Subchapter S Corporations

 An S corporation can have no more than 35 shareholders. It can have only one class of stock, and no other corporations can own stock. Filing requirements are relatively simple - Form 2553 must be sent to the IRS before the 15th day of the 3rd month of your corporation’s taxable year. McQuown lists the performing arts as one of the “perilous professions”. These are professions that the IRS defines as having the principal function of “services in the field of law, health, engineering, architecture, accounting, actuarial science, performing arts, or consulting.” (26) Since the1987 Revenue Act, the regular (C Corporation) corporate tax rate for these professions increased to a flat 34%.  (27) S corporations have become more attractive to performing artists since  under an S corporation, part of the income is taxed at 15%, and the remainder at 21%, both better rates than the 34% flat rate in the Revenue Act of 1987. The S corporation is treated as a corporation for legal purposes, but like a partnership for tax purposes (28). The profits and losses are not taxed. They flow from the corporation to the shareholders. Shareholders who are owner-employees may benefit from lower income tax rates. “A net taxable income of $50,000  puts your corporation in the 15% bracket, but puts you, the entrepreneur, in the 28% bracket, whether you are single or married, a difference of 13%.”(26) Although the tax figures look favorable for the performing artist,  the corporation legally exists separate from its members. The nature of theatrical work is such that individuals are not as interchangeable as the corporate regulations require them to be.

 C Corporations

 The C corporation does not allow the income to be directly passed through to the share holders. C Corporation stocks are publicly traded. This option achieves greater tax savings for those who are considered to be outside  McQuown’s “perilous professions” and will not be elaborated on because the focus of this paper is exploring options most advantageous to the performing artist.

 Nonprofit Corporations

 Most, if not all legitimate (AEA -LORT) theaters have incorporated as nonprofit companies. This means no part of their income “ is distributable to its members, directors, or officers.” (28) The employees receive salaries, which are reasonable for the field, and those salaries are counted as a corporate expense. All other funds must be applied to the corporation’s purpose. A nonprofit corporation has two sources of income, earned and unearned (29). Unearned (a misnomer consideringwork involved in fundraising and grant application writing) income consists of grants, and contributions. Earned income comes from ticket sales, concessions, and any class tuition from educational programs. A nonprofit corporation cannot issue stock, dividends, or other creative forms of debt and securities. But a nonprofit corporation can have members, who donate money, and have a say in the decision making. A nonprofit corporation is still subject to the organizational, and reporting requirements of incorporation.

  Average Tax Paying Performing Artist

 Some attention must be given to the tax and legal situation most performing artists find themselves in, that of the average citizen with no corporation business schemes. According to the  1986 Tax Act, a certain amount of relief was given to performing artists, allowing them to deduct all business expenses provided they met the following qualifications:

 “You must be an individual who has performed services for at least two employers in the performing arts (this would seem to include support personnel) during the year in question; your legal deductions connected with performing said services must equal more than 10 percent of gross income from performing arts (not 10 percent, more than 10 percent); your adjusted gross income, without taking the performing arts deductions into account, must be $16,000 or less.” (31)

• Initiation fees, union dues, professional society fees
• Contract legal fees
• Commissions to agents and managers
• Professional Registries (Players Guide, Academy Players, etc.)
• Classes and Coaching lessons for maintenance of profession
• Cosmetics and Dressing Room supplies for professional (not street) use
• Hair care for specific jobs
• Photographs and resumes
• Stationery and postage for mailings
• Theater books, scripts, sheet music, rosin, tapes, records, etc.
• Portion of home phone bill used for business
• Theatrical wardrobe (excluding conventional, ordinary use)
• Wardrobe maintenance
• Viewing Theater, Film, and Concerts
• Promotional Tickets
• Rehearsal Studio bills
• Accompanists
• Office in the home
• Trade papers
• Travel Expenses (for jobs)
• other deductions (Hanlon, pp. 35-47)

  “The real benefits start at around $30,000 a year. At $30,000 net taxable income, single entrepreneurs are in the 28 percent tax bracket. However, if they draw a salary of $20,000 instead and retain $10,000 in the corporation, they are taxed at approximately 15 percent on the $20,000 and the corporation is taxed at 15 percent on the $10,000. For married people, real tax advantages start at around $40,000 net taxable income.” (32)

 Another consideration in the question to incorporate is in what state should the corporation  reside. Delaware is an extremely popular state for incorporation activities. Nicholas writes, “Delaware is emphasized as the state in which to incorporate. Regardless of where a person lives or has a business, this book enables a person to incorporate and take advantage of Delaware Corporate Law. In Delaware, anyone can form a corporation as long as he completes the forms provided for that purpose himself.[...] The biggest percentage of corporations formed in Delaware are headquartered in other states. The individuals who own these corporations almost never visit the state.” (34) Nicholas goes on to give other reasons for incorporating in Delaware. For a small corporation there is no minimum capital requirement, one person can be all the directors on the board, the state of Delaware has a separate court system devoted to business, and ownership and operation can be done anonymously. Delaware is friendly to corporations because the state generates a huge volume of resources from corporations. These features are very attractive at first glance, until one remembers that part of the purpose of setting up a corporation as a separate legal entity requires that there be clear separation between the individual and the corporation, so having one person be all the board members contradicts the separation and could be used by the IRS in pursuit of underpaid personal income taxes. Anonymous ownership is not necessary to protect limited partners from liability. That provision seems to be geared to businesses of more questionable nature. And if the purpose of the corporation is to be believed by the IRS in tax court (as in the Laughton case), it helps to have capitalized the start-up of the corporation to at least a minimal degree. Will the IRS really believe in the purpose of a film or theatrical  production company started with no capital? What is unsaid in the Nicholas book, is that other states may charge an annual fee to “foreign” (not incorporated or resident of state in which the business is transacted) corporations for the privilege of doing business in that state. New York is one such state. The volume of performance related work in New York is well known, and must be considered. These fees may not be problematic for larger corporations with many employees, doing business in many states, but it may hinder the performing artist who is starting on a smaller scale venture.  A corporation in Delaware is required to have an agent residing in Delaware, and that is an added expense if the artist does not have a collaborator in Delaware, or does not live there herself.

 The following examples are simplified tax calculations done for varying goals and business organizational structures. Basic tax issues such as deductions, and income tax rates will be addressed to highlight how business organizational structures can further the artistic goals of starting a theatre company or producing a film. The initial circumstances are constant for clearer comparison. Four very fortunate actors, Larry, Moe, Curly, and Shep each earn $100,000 in one fiscal/calendar year. The assumption is made that they each take $10,000 in deductions that are acceptable for their individual business situations. This simplifies the discussion, because for example, a corporation can deduct all business expenses, but an average tax paying performing artist who earns more than $16,000 can only deduct up to 2% of their total income.
 
The intricacies of tax law, although relevant, are beyond the scope of this paper. The assumption is made that other deductions were taken, like medical and moving expenses, mortgage interest, that total $10,000 for the average tax paying performing artist, Larry. One interesting fact to point out is that a corporation is allowed to deduct all business expenses, as well as employee pension plan contributions, and contributions to employee health plans (36), but the average tax payer is not.

 In Moe’s case, it serves him well to have a clearly stated purpose for his LLC. If he is taken to tax court, the IRS may judge that his income is a personal service contract income, and therefore he has to pay personal income tax on it, unless he can prove that the corporation earned the income. Moe should review the Charles Laughton case mentioned previously.
 
Curly has the goal of opening a nonprofit theater, which is included in his corporate purpose. In order to enjoy the corporate tax rate on his income, Curly also needs to make sure that his work is clearly contracted by the corporation he sets up, and that the contracts are worded so there is no doubt that it is a contract between his nonprofit company, and the entities that paid him his $100,000.
 
Shep’s case is the most complicated of all the cases. Shep is in dire need of an accountant familiar with entertainment tax planning and the motion picture industry because the combination of tangible and intangible assets, coupled with the ability to depreciate and amortize property and income produce legions of possibilities only experts can decipher. The simplifications are made in Shep’s case to keep the discussion simple, and are no way intended to imply that no legal or accounting advice is necessary.

 Larry - Average Tax Paying Performing Artist
 
Larry earns $100,000 in 1998, and spends $10,000 n miscellaneous deductions such as business deductions as outlined in Hanlon (PP 35 -44, and IRS form 1040, schedule A), his Keogh retirement savings plan  (IRS form 1040 line 29, publication 560), medical insurance (IRS form 1040 line 28, form 2555) and expenses, and business use of his home (IRS Form 8829). Larry’s taxable income is $90,000.From the IRS form 1040 tax table, he finds his income tax (for a single person) is $22,770. If Larry did not keep track of deductions, his tax would be $25,855. Informed, accurate recordkeeping saved Larry $3,085 in taxes.

 Moe - Incorporated with one or more partners, as an LLC
 
The LLC, as a result of Moe’s acting work, takes in $100,000. He gives himself an annual salary of $40,000.  The LLC spends $10,000 on miscellaneous expenses, necessary for Moe to pursue work, as well as any insurance the partners may want. The LLC will also deduct from the earned income, the expense of Moe’s salary, leaving $50,000 as taxable income for the year. The corporate tax rate is 15% for the first $50,000, with 25% of the amount between $50,000 - $75,000, and 34% of  any amount over $75,000, with smaller percentages taken out for amounts of $100,000 or more, which do not affect this discussion (37). The LLC in this case pays the 15% tax on $50,000, totaling $7,500. Moe pays a personal income tax (assuming no deductions for the sake of simplicity) on $40,000 of $7,912. A tax total of $15,412 has been paid to the federal government; $7,358 less than what Larry paid. Of course Moe must have an agreement with partners he trusts on how to spend or distribute the other $50,000 collected over the year. The purpose of the corporation must be supported by their plans for the $50,000, and the formalities of contracting with the LLC must be observed, or Moe may eventually be liable for the complete personal tax rate plus the interest on the difference ($7,358 for 1998), should the IRS doubt his and the LLCs operations. This raises the issue of substance and form in the way the IRS evaluates corporations. The form of the business may be such that lower taxes are being paid, but if the substance of the work, or contracts, is essentially a personal service, then the IRS will assume that the actual purpose of the business is to avoid taxes. The tax court can rule that the person who actually earned the income hid behind the form of a corporation and is liable for all the personal income tax.

 Curly - A Nonprofit Theater Company Founder

 Curly must obtain nonprofit status from the federal government, which involves his proving that the company will serve the good of the community. This can be reflected in the corporation’s Third Article of Purpose. Curly earns $100,000 in 1998, through contracts that connect his nonprofit theatrical company with the employers that pay for his acting services. He cannot sign a contract directly with the employers, or his income will be judged personal, and he will not get the tax benefits he needs to apply to his new theater company. Contractually, his situation with employers is similar to that of Moe’s.  Curly takes a more modest salary of $35,000 because it serves his goal to establish a theater company, and he has to draw a reasonable salary as an employee of a nonprofit corporation, of which he is a member. According to the IRS form 1040, he pays a personal income tax of $6,512. The company spent $10,000 on obtaining work, rent for office space, grant applications, fundraising events, and other miscellaneous business related costs. Because it is a nonprofit company, it cannot distribute its capital to members. Reasonable salaries are considered a corporate expense. That means the company must either spend the remaining $55,000 on the production of a theatrical event, or justify the accumulation of capital as necessary for the corporation’s purpose.

 Note that Curly is paying a fraction of the taxes compared to Larry and Moe. But Curly is also devoting most of his income to the purpose of establishing a theater company. By keeping his personal income at this lower level, Curly has $16,258 more to devote to his theater (comparing Larry’s tax burden with that of Curly’s). This way, Curly has decreased the total tax paid to the government. However, for this to be the case, the nonprofit corporation should already exist when Curly began the work that brought his theater company the original $100,000.

 Shep - Limited Partnership devoted to Film Production
 
Shep also needs to have the limited partnership in placebefore he engages in the work that brings $100,000 to this enterprise. Shep lives modestly compared to Larry, and gives himself a $35,000 annual salary for 1998, which makes his tax burden $6,512, just like Curly’s. Shep’s limited partnership also spent $10,000 on deductible business expenses. The partners spend all the remaining $55,000, on producing a film. Assuming Shep has two other partners and they have agreed to divide the losses equally, Shep has an added business loss of $18,333. Shep’s life begins to get complicated when he looks at IRS schedule C, and page C-3 of the IRS 1040 instruction book, and sees that capitalizing costs of property are treated differently for motion picture films and require Publication 538 for further details.

 Of all the cases so far, Shep’s most needs an accountant well versed in motion picture finances. The IRS and Hollywood have generated a volume of cases whose holdings affect everything from a films ‘useful life” to depreciation time limits, and amortization of tangible and intangible assets. Shep and his partners will not be able to deduct their full share ($18,333 each) of expenses in the film production from their personal tax returns this year. Schuyler Moore (section 5) gives guidelines and numerous footnotes describing cases that indicate depreciation of a film begins with the first marketting efforts, even if there are no buyers. A safe guideline is that the film’s useful life is 5 years, and a tax credit will be based on a straight line depreciation. Shep and Partners will be able to take $3,666.6 loss ($18,333 divided by 5) each year for 5 years for this one film.

 If Shep has a prolific burst of creativity and makes several films back to back, he will really need an accountant to keep all the depreciation tax credits organized and well reported. If any of the films make a profit, the accountant will deal with the myriad of income forecasting, and capital gains guidelines and regulations. Moore’s book shows that the IRS treats the entertainment industry differently from many other businesses due to the proportion of intangible assets, difficulty of predicting income, and the creative way producers determine net profits.

 Assuming Shep takes the $3,666.6 loss this year, his tax payment to the IRS drops from $6,512 to $5,476 (based on the $31,334 taxable income).  He reserves another $1,036 for himself because he and his accountant were aware of how tax laws treat film production. Under these conditions, Shep will pay less taxes than Curly, who has the nonprofit theater company. 

1) Mayfield, Katherine, Smart Actors, Foolish Choices

2) Acting as a Business book list:

• Smart Actors, Foolish Choices,;
• How to Act and Eat at the Same Time;
• How to Be a Working Actor;
• An Actor’s Business;
• How to Sell Yourself as an Actor

4) AEA website statistic: www.actorsequity.org/ResourceCenter/index.html

5) SAG website: www.SAG.com/Wannabe.html

6) Biederman, et. al., p. 606

7) Discussion with SAG representative, NY Local,  Kate McNally

8) McQuown, Inc. Yourself

9) Diamond, How to Incorporate, 3dr. Edition, p. 3

10) Diamond, p. 4

11) Diamond, p. 4
 
12) Diamond, p. 5

13) website: www.reelwomen.com/jodiebio.html

14) Esperti, Incorporating Your Talents, pp. 1 - 3

15) Diamond, p. 52

16) Victor Borge, Sanna Borge, and Danica Enterprises v. Commissioner of Internal Revenue Service 405 F 2nd. 673

17) Rubin v. Commissioner of Internal Revenue Service, 51 TC 251

18) Hogle v Commissioner of Internal Revenue Service, 132 F 2nd 66

19) Siegel, Entertainment Law, 2nd Ed., p. 320

19a)Vogel, Harold; Entertainment Industry Economics, A Guide for Financial Analysis, 4th  Edition, p. 291

20) McQuown, p. 72

21) Diamond, p. 122

22) Diamond, p. 125

23) Diamond, p. 134

24) Siegel, p. 321

25) McQuown, p. 73

25a) Vogel, p. 291

26) McQuown, p. 76

27) McQuown, p. 45

28) McQuown, p. 75

29) Diamond, p. 7

30) Meeting with Ron Clark and Jody Hovland of Riverside Theater, March 4, 1999

31) Hanlon, New Tax Guide for Performers, Writers, Directors, Designers, and Other Show Biz  Folk, p. 25

32) McQuown, p. 13

33) McQuown, p.11

34) Nicholas, Ted; How to Form Your Own Corporation Without a Lawyer for Under $50, p. 1

35) Moore, Schuyler; Taxation of the Entertainment Industry, p. 5-7, 5-8

36) McQuown, chapter 11

37) Diamond, p. 92

Biederman, Donald, Pierson, Edward, et. al.; Law and Business of the Entertainment Industries,  3rd edition,  Praeger Publishers, Westport CT, 1996

Callan, K.; How to Sell Yourself as an Actor, 2nd edition, Sweden Press, Studio City, CA., 1992

Corman, Roger, Jerome, Jim; How I Made a Hundred Movies in Hollywood and Never Lost a  Dime, Random House, New York, 1990

Daniels, Bill, Leedy, David, and  Sills, Steven; Movie Money, Understanding Hollywood’s  (Creative) Accounting Practices, Silman James Press, Los Angeles, 1998

Diamond, Michael R. , Williams, Julie L.; How to Incorporate, 3rd Edition, John Wiley and  Sons, Inc., 1996

Esperti, Robert; Incorporating Your Talents, McGraw-Hill Book Company, New York, 1984

Hanlon, R. Brendan; The New Tax Guide for Performers, Writers, Directors, Designers and  Other Show Biz Folk, 3rd Edition, Limelight Editions, New York, 1994

Henry, Mari Lyn, and Rogers, Lynn; How to Be a Working Actor, 2nd edition, M. Evans and  Co., New York, 1989

IRS form 1040 and Instructions

Logan, Tom; How to Act and Eat at the Same Time, 2nd edition, Communications Press,  Washington D.C.

Mayfield, Katherine; Smart Actors, Foolish Choices, Backstage Books, New York, 1996

McQuown, Judith H.; Inc. Yourself, HarperCollins Publishers, Inc., New York1995

Moore, Schuyler; Taxation of the Entertainment Industry, Warren, Gorham, and Lamot, Boston, 1995

Nicholas, Ted; How to Form Your Own Corporation Without a Lawyer for Under $50,  Enterprise Publishing Co., Inc., Wilmington DE, 1980

Reily, Andrew; An Actor’s Business, Venture Press, Ft. Lauderdale Fla., 1996

Siegel, Howard (Esq.), editor-in chief; Entertainment Law,Second Edition, New York State Bar  Association, 1996

UCLA School of Law; UCLA 7th Annual Entertainment Symposium, the Regents of the  University of California, 1982

Vogel, Harold; Entertainment Industry Economics, A Guide for Financial Analysis, 4th Edition,  Cambridge University Press, New York, 1998