BY ROBERT J. LABATE

We had a serious difference of opinion and everyone was a bit frustrated. However, the worst part was that we were all supposed to be on the same side.

The participants in this discussion were four would-be producers and me. Each individual had a unique talentÛone directed, one acted, one wrote screenplays and one had a MBA--and their idea was to pool their talents and money together to produce independent films. But problems arose when we began to discuss who would control the project and how the four "friends" would resolve their creative and business disputes.

For instance, assuming that the "friends" created a production company and that each "friends" owned 25 percent of that company, how would they resolve deadlocks if two were for one idea and two were against it? Who would be primarily responsible for operating the production company and who would be responsible for the keeping track of the money? Moreover, what would they do if irreconcilable creative differences arose during the production of the first feature film?

I was asking difficult questions, but I didn't intend to start a verbal brush fire.

Good Fences--Establishing Clear Lines of Authority
Entertainment projects--whether music, theater, film, television or publishing--are complex enterprises, often requiring the collaboration of many individuals. A thousand things can go wrong, money shortages are common, the creative "vision" of the principal players often differs and the project may take several years to complete.

Under such circumstances, egos will be bruised and even the best friendships will be strained. People who have not worked together previously are particularly at risk because their work habits and creative visions may not be compatible. Also, if differences cannot be resolved, one collaborator may simply walk away from the project--leaving everyone else with a half-finished film (or album), unpaid bills and impossible-to-resolve claims to the few saleable assets, such as finished scripts or music.

Given these realities, I usually ask tough questions whenever I meet with first-time producers to see whether or not they have created "good fences" and if they've adopted procedures for resolving disputes. Sometimes, I convince clients to adopt procedures and execute agreements which clarify the rights of all parties involved and othertimes I create a firestorm which ends the production before it starts.

Documenting Your Relationship
Most young producers understand the reasons for working in corporate form, but they are surprised to learn that creating a production company is just the first step. While each situation is unique, a few basic procedures and agreements are generally helpful.

1. Create and Maintain A Corporate Record Book. The essential first step is to form a corporation (or a limited liability company) by filing articles of incorporation with the Illinois Secretary of State. The difference between a regular C-corp (or S-corp) and an LLC will be discussed in a future column. The Illinois Secretary's web-site (www.sos.state.il.us) contains forms for downloading and web-pages where you can check, informally, to see whether your proposed corporate name is still available. DonÌt forget to apply for a new Federal Employer Identification Number (FEIN), which can be obtained either by telephone (816/926-5999) or via facsimile (816/926-7988).

Many people file articles of incorporation, but fail to create a corporate record book. This is a big mistake, particularly if more than one person will own and operate the company. Corporate minute books--which can be purchased from Dwight & M.H. Jackson Corporation, 205 West Jackson in Chicago--generally contain a number of form resolutions, consents and by-laws which your attorney or accountant can modify to fit your particular circumstances. Limited liability companies are governed by an operating agreement, which should be prepared only by an experienced attorney.

By completing these documents, you create a written record regarding who owns your company, how it is organized and who has authority to control the company's operations. It's much easier to discuss and resolve these questions before you begin operating rather than waiting for an argument to arise.

2. Create Shareholder Agreements. If your privately-held corporation will be owned by more than one individual or entity, you should have a lawyer prepare an agreement, which restricts the shareholders' right to transfer shares of the company's stock and which determines, in advance, how to calculate the value of those shares. Disgruntled shareholders become much more reasonable if they know exactly how much (or little) their shares are worth and subsequently shareholder disputes are easier to resolve.

3. Employment/Consulting Agreements. Owners of small entertainment companies frequently wear many hats. In addition to keeping the books, one owner may also write screenplays or produce music for the companyÌs projects. If that person suddenly left the company, questions would exist as to the ownership of material which he or she provided to the company during his tenure and as to the compensation due to that individual for his past efforts.

This discussion merely scratches the proverbial surface, but it should give you a good starting point if you are thinking about collaborating with other artists or entertainment professionals.

©2000 Robert J. Labate. This column is provided as a source of information and is not to be construed as legal advice or opinion. The characters and situations are entirely fictional. You may send questions or comments to Robert J. Labate, Defrees & Fiske, 200 South Michigan Avenue, Suite 1100, Chicago, IL 60604.

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