Tom is a talented actor. He is a short-term employee of various production companies on film, television and other commercial acting gigs. He is accustomed to being paid as an employee with all of his wages subject to self-employment tax (Medicare and Social Security tax). Because Tom makes more than $100,000 per year acting, he could benefit from forming a new company of his own to “loan out” his acting services to the production companies for which he works. This one-person company arrangement for the personal services of its owner is called a Loan Out Company. By having his own business, he is eligible to make an “S-election” with a corporation or a limited liability company to reduce up to half of his self-employment taxes for the social security portion, potentially saving him thousands of dollars per year. This can be done by (i) paying out half the profit after deductible benefits and expenses as salary subject to the combined 15.3% Medicare and Social Security Contributions and (ii) taking out the other half of the profit as Subchapter S Dividend not subject to the 12.4% Social Security contributions. Outside the entertainment industry, the same arrangement can benefit others who are talented and work a series of short-term employment engagements, like consultants.
A Loan Out Company turns short-term employment arrangements into independent contractor relationships. People with unique talents can benefit from tax reduction and asset protection by forming a company to sell their personal services. Some common examples include Hollywood actors, musicians and writers who contract with movie production companies or concert venues. Other examples may include newer “gig economy” type workers who sell their services through Uber or Airbnb type channels where services are loaned out to third parties obtained through a mobile app. For example, a registered nurse who uses Care.com to find patients for her elder care service could form a Loan Out Company to contract with patients directly.
A common structure of a Loan Out Company is a single-owner LLC that elects to be taxed as an S-Corporation. The Loan Out Company is essentially an intermediary between the individual with talent and the third party wanting the individual’s personal services. A Loan Out Company is not a different type of entity, it is just a way to describe a single owner company whose purpose is to improve asset protection and provide tax benefits for an individual employed through short-term engagements.
Forming a Loan Out Company is a good idea for people who earn $100,000 or more per year through a series of short-term engagements. It is only at that level of income that the tax savings more than pay for the administrative costs of the LLC. A Loan-Out Company can reduce the entertainer’s effective tax rate, largely because part of the actor’s income can be exempted from self-employment tax.
A Loan Out Company also affords the entertainer a greater degree of asset protection from contract liability than being an employee or sole proprietor. For more protection against personal injury liability, insurance can be obtained by the Loan Out Company. The entertainer’s personal wealth should be kept separate from the the Loan Out Company. A separate bank account should be opened for the income and expenses of the Loan Out Company. Contracts should be entered into in the name of the company with the manager signing in the signature block. A separate contract should be maintained between the Loan Out Company and its owner for the owner’s personal services in case of a lawsuit, audit or questions by a production company.
Anyone interested in determining the amount of savings should seek out the assistance of a tax advisor. The tax advisor may suggest the Company also consider a C-Corporation tax election, which may achieve a lower tax result based on recent tax law changes. If applicable, creative people should ensure that their Loan Out Company does not result in the transfer of copyrights for creative works. This arrangement is not an alternative to long-term employment for ordinary employees, just those in the gig economy.
About the author
John Legaré Williams, Esquire practices business law through The Williams Law Firm, P.A. (www.TrustWilliams.com). He is also President of Agents and Corporations, Inc. (www.IncNow.com), a family owned and operated incorporation service that provides filing and registered agent services in Delaware to business owners from around the world. Nationally, Mr. Williams is a frequent speaker nationally on the topic of Delaware LLCs and in particular the Delaware Series LLC, the most cutting-edge entity on the market.