The Film’s Production Shell Company – How It Works

I wrote the following as a reply to a comment sent to me by someone doing pro bono work for an independent film producer. The question was about how the production’s shell company worked. here’s my answer:

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Hi, Nancy. Thx for commenting.
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Development

During development the independent film company sets up any development costs as Inventory on their balance sheet. This could include proportional allocation of general costs like trips to Cannes, to AFM, to film festivals, etc., as well as direct costs like options paid for exclusive rights paid to a writer, etc. It’s wise to put some, or all, of the development cost for each project in the Film Budget for the project you’re in the midst of raising finances for. That way, if the project gets financed, you can get those development costs paid back. If the project never gets financed, a common problem for independent producers, then the inventory of costs can be written off. As you can imagine, the write-offs are big in times of net revenues and very little in times of net loss. It’s also wise to put a fair salary for the independent film producer in the film budget, because it’s always a long-shot if the independent producer, as an equity investor, will ever actually get to see any cash after release.

The Prod Co

At about the same time that the project is getting financed – that is, the investors for a particular project have committed and the cash to do the film/tv production is finalized, a shell company is formed with the single purpose of producing that particular project. The shell company concept is common with film and television productions. It’s often referred to as the “Prod Co”, i.e. Production Company. It doesn’t have revenues, only funding (equity or loans) and costs. Any assets bought or built during the production (wardrobe, cars, etc.) are not booked to a Balance Sheet account, but rather are booked as a cost and then in post the assets are sold and the proceeds are credited towards the costs. At the end of the post-production period there should only be an empty bank account, the funding and the cost of the film/tv production.

A Clean Statement of the Cost of the “Negative”

This makes the Prod Co a clean statement of what used to be called the “Negative Cost” – so many productions are shot in digital now that it’s a fading term, but the concept is still the same. The costs are easily audited for any State Tax Incentive, as well as for any investor’s audit purposes. This statement of costs is universally referred to as “THE Cost Report”. (I often wish we had an industry specific term for it, because the term “Cost Report” is synonymous with just about any business.)

Legal Rights and Ownership

The Prod Co as a separate entity keeps things clean from a legal “Rights” standpoint. The Prod Co owns the rights to the creative work – i.e. has had the rights assigned to it – provided, of course, that the writer, director, cast. site locations, all signed the proper release and transfer of rights documents – this is not as big a deal as the lawyers would like you to believe, but it’s still important and you need to have those doc’s signed and to hand when selling the final product.

The Prod Co also helps to keep things straight from a legal “Organization” standpoint. The various ownership structures, and various positions of loans to be repaid, can all get pretty confusing, but having it under one Prod Co entity at least narrows the confusion to one entity. (As a note, I see that many of the Prod Co’s now are LLC’s, which probably means that the taxable gains/losses can go straight back to the individual investor for the US Federal Tax Credit under section 181 – it may also help foreign investors – anybody who has a comment, or can enlighten further, please ‘pitch-in’.)

Way down the road, after the film/tv project has been sold (and re-sold, dvd, etc) there may be, hopefully, something left for the Prod Co’s equity shareholders – after distribution costs, salesman’s commissions, SAG/WGA/DGA residuals, bank loans, etc. The Prod Co should be in receipt of those cash revenues, and the equity participants can finally get their hands on that cash. This is where the infamous “Back End Points” comes in so handy.

In Summary

In summary, the Prod Co is created when the financing is in place to make a particular production. It’s the Prod Co that makes the deals with the bank for loans, with the bonding company, with the WGA/ DGA/ SAG, with the investors, etc. It’s also the Prod Co which makes the sales deals, distribution, broadcast, dvd, etc. So, it needs to be designed with the best tax advantages in mind for the equity participants, in the hope that some cash will actually be arriving in the Prod Co’s bank account sometime in the future.

I hope that helps. It’s a pretty decent rundown, so i think I’ll post it as a blog as well.

Best
John

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About filmproduction
I have worked in the film production industry since 1985, working on over 50 different productions of every size in 6 different countries. My self-published book, "Walk The Talk" is written in an easy to read manner for film students and working professionals who haven't had the chance to learn how to 'Direct the Money'.

5 Responses to The Film’s Production Shell Company – How It Works

  1. John says:

    Very helpful. One question: from what source does the annual (hopefully minimal) operating costs of the shell Prod Co typically continue to be funded?

    • Sorry for this late response – it somehow slipped me by. To answer your question, the full funding for the production, including any prep/shoot/wrap/post period should be fully declared in the “Approved Film Budget”. From this film budget you find the financing in full to complete the film or television production. Once you have distributed/broadcast the product there should be no direct overhead incurred by the ProdCo. It’s a single purpose company that has reached it’s purpose once the product is finished – at that point the overhead consists of costs to sell/re-sell the product. The distribution revenue stream could be retained by the ProdCo and if that’s the case the revenue stream is the source of funding; however, the copyroght/ownership is most often legally assigned to a distribution wing owned by the film producer, or is outright licensed/sold sold to a distributor or sales group, who continue to flog the product in different territories and different mediums. So, the cost of operating the shell company (i.e. the single purpose ProdCo) is really only a yearly tax return, as an further related costs are selling/distributing costs offset by the expected revenue stream.

  2. Nancy says:

    Thanks John!
    Wow, what a complete answer. It is going to be so helpful. I’m also going to look into tax credits further. I’ll bet my client is not familiar with them. I think I will also sign up for the on-line portion of your seminar.

  3. DM says:

    My sister and I are making a documentary together. We plan to create an LLC. An acquaintance of ours believes in our cause and has volunteered to help us. However, he is not going to be a member of our LLC and he is not an owner of the film. He is VOLUNTEERING his time, we have not requested his help nor offered him to be an owner in any way, and I want to make sure that the product belongs to my sister and me ONLY. Even though it is understood that the film belongs to my sister and me only, I want it legally set in stone so that I know there are no problems down the road. We don’t plan to make any money off the film. I just want to know that the film isn’t being used anywhere without my approval. In short, I want to know and have complete control over EVERY way in which the film is used.

    Do you know where I can find out some information about this? I have been looking online but I can’t find anything about a situation like this one. You seem to know your stuff so I figured you may have an idea about some credible sources for finding out this sort of information.

    Any advice would be greatly appreciated! Thanks!

    • Gosh. Maybe I’m being a little too cavalier here, but I would say that you simply need to have anyone associated with the created work release any/all of their claim to rights regardless of payment. Below is an ironclad “assignment of rights” that can be used to create an agreement that works for you – note that you need to change the State in which you’re residing and use an individual’s name if not incorporated – I don’t pretend to be a lawyer so in the end analysis you should take whatever you end creating to an entertainment lawyer for a final stamp of approval. Personally, though, I wouldn’t spend my money that way – I’d just get a good agreement signed assigning me all rights, get it all down in writing, and get everyone to sign the darn thing. This ‘boiler plate’ assignment doesn’t have a space for witnesses, but I’d put a line at the bottom and have a witness sign as well. Here’s a usual assignment format:

      “WORKING TITLE”
      ASSIGNMENT AND ASSUMPTION AGREEMENT
      THIS AGREEMENT dated as of _____________.
      B E T W E E N:
      Entity “A” , a corporation incorporated pursuant to the laws of the State of ____________ (hereinafter referred to as the “Assignor”)
      – and –
      Entity “B”, a corporation established pursuant to the laws of the Sate of ____________ (hereinafter referred to as the “Assignee”)
      WHEREAS:
      A. Assignor has entered into the contracts attached hereto as Schedule “A” in connection for the feature length motion picture currently entitled “WORKING TITLE” (the “Property”)
      B. Assignor wishes to assign to Assignee, all of its rights and obligations under the Agreements;
      NOW THEREFORE in consideration of the covenants contained herein and for other good and valuable consideration (the receipt and sufficiency of which are hereby acknowledged), the parties hereto agree as follows:
      1. The preamble hereto shall form an integral part hereof as if herein set forth at length.
      (a) Assignor hereby assigns to Assignee all of its rights and obligations under all of the agreements entered into by it in respect of its rights and obligations as a production facilitator with respect to the Property, namely those agreements attached hereto as Schedule “A” (collectively, the “Agreements”).
      2. Assignee hereby accepts said assignment and assumes all of said Agreements as if it had been a party to each of the Agreements in the first instance.
      3. The Assignor and the Assignee hereby consent to the assignment and assumption of each Agreement as set out herein.
      4. The assignment and assumption of the Agreements as contemplated herein shall be effective upon the execution hereof, without further act or formality.
      5. Assignor hereby agrees that this assignment shall not have the effect of releasing it from any liability under the Agreements.
      6. This agreement shall be governed by and construed in accordance with the laws of the (State/Province in which you reside/operate).
      7. This agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute one instrument.
      IN WITNESS WHEREOF, the parties have executed this agreement as of the date first written above.

      ENTITY A

      By:
      Authorized Signing Officer

      ENTITY B

      By:
      Authorized Signing Officer
      _______________________________________
      Schedule “A”

      (i) List any and all points that you want covered.
      (ii)

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