BY BOB LaBATE
Few things are as frustrating, and expensive, as a film project that collapses because it was built on a smile and a handshake. It happens frequently that, on the eve of principal photography and after spending tens of thousands of dollars, young producers realize they need either to start over or to abandon the project. Yet, if a project has a proper foundation, many of the more common pitfalls can be avoided or the effect of falling into a production pit can be minimized.
The Value of Three
A proper foundation generally requires a producer to take three steps early in the life of the project: create (and maintain) a proper business structure; document all collaborative elements of the project; and obtain rights and waivers for materials on which the project is based. None of this is simple or inexpensive, but if you want your project to be commercially viable, you have little choice but to make sure that these three building blocks are firmly in place well before you begin principal photography.
1. Business Structures–There are a variety of business structures on which to base your project including: a "C" corp.; an "S" corp.; a limited liability company ("LLC"); a limited partnership ("LLP"); or a non-profit corporation ("NFP"). Because film production is a slow-return/high-risk enterprise, I don’t recommend conducting business as an individual (sole proprietorship) or as a general partnership, both of which provide no protection to you (the producer) from the obligations of the business. However, which business form you choose depends on your particular circumstances and the amount of money you have at hand.
An LLC is a popular structure combining the tax advantages and flexibility of a limited partnership with the liability protection of a corporation. But (and this is a huge but) you must have experienced assistance when preparing the LLC Operating Agreement, which is the basic agreement governing the operation of LLC and the relationship between the LLC manager and its members. Taking an LLC operating agreement from a form book or, worse, downloading an example from the net is quite risky because the operating agreement you copy may not fit your particular needs and purposes. It can be both difficult and expensive to modify your operating agreement one or two years into a project when you realize that you’ve omitted some critical components or you’ve left yourself too little room in which to operate.
The other problem with using an LLC is that it allows you to produce your project with other people’s money. For particulars, see my prior column "The Lure Of The LLC." While taking money from others and retaining effective control sounds like heaven to most producers, it is almost a certainty that taking investor’s money requires you to comply with state and federal securities laws and regulations. Among other things, you likely will need to prepare a private placement memorandum ("PPM") to protect you, at a minimum, from anti-fraud provisions of federal securities law, and you will need to comply with "Blue Skies" laws adopted by the states where your investors reside.
If this sounds complicated and expensive, it is. Because of such complexity and cost, many young producers elect to operate in simple corporate form (either "S" or "C") until they are certain that the cost and complexity of organizing an LLC is justified. Ask your accountant whether an "S" corporation or a "C" corporation is best for your situation.
Forming a standard corporation is relatively simple and many states, including Illinois, provide the necessary forms, together with a description of the incorporation process, on the Web site maintained by the Secretary of State. The cost and filing requirements depend upon the state where the corporation is formed, but it is normally between $100 and $200 and the Articles of Incorporation are only a few pages long. For information on forming an NFP, see my prior column, "A Brief Guide To Forming A Not-For-Profit."
2. Documenting Collaborations–Film projects, even in the early stages, are collaborative efforts but, as the years grind on, some of the initial collaborators may lose interest or may disagree with the direction of the project. Documenting such relationships is essential. In particular you must decide (and document) what happens if one or more collaborators decides to leave.
The reason for taking such precautions is that, under federal law, copyright protection arises automatically whenever an original work is fixed in a tangible medium from which the "work" can be perceived, reproduced or communicated. Thus, whenever a "work" (such as a drawing, script, film, photograph, sculpture or choreography) is put down on paper (or in some permanent or semi-permanent form) then the creator, or creators, of the "work" have the exclusive right to distribute, reproduce, modify, distribute, perform or display the "work."
When two or more people are collaborating on creating a film, questions exist such as "Who is the creator?" and "Who may exercise the exclusive right to distribute, reproduce, modify, distribute, perform or display the film or portions thereof?" For more discussion, see "The 'Work Made For Hire’ Puzzle" and "Cultivating Copyrights, Parts I and II." To resolve these questions, it is absolutely critical that people who collaborate on a film, such as co-writers, co-producers or joint-venturers, write down their agreement on these issues. For examples of such agreements, you might consult one of the legal forms books for film, such as Mark Litwak’s "Contracts for the Film & Television Industry," available at amazon.com. You will thank me later.
3. Obtaining Rights and Waivers–Everyone who touches your film should do so pursuant to a written agreement, and this begins with the script or the underlying literary work on which the screenplay is based. This begins with all written material developed by your production team or material submitted to you by third parties. You may decide not to use the submitted material, but your finished film may have certain similarities to submitted work and thus make you liable. Thus everyone working on your film must have an agreement, including: cast, crew, choreographers, writers, film editors, line producers, directors, musicians, composers, special effects designers, film advisors, extra talent, make-up artists, etc. It is a long list, and for samples of such agreements see books like the Litwak work listed above.
If this all seems incredibly difficult, it isn’t, but it does require an uncommon attention to detail and procedure. Your reward will come when you are able to "deliver" your film to a distributor for a healthy advance.
©2003 Robert J. Labate. This column is provided as a source of information and is not to be construed as legal advice or opinion. You may contact me via e-mail at robert.lßabate@hklaw.com or, via mail to Bob Labate at Holland & Knight LLC, 500 West Madison Street, Suite 4000, Chicago, Illinois 60661 312/715-5700.