In the arts community there are often times where two companies decide to coordinate on the completion of a project much like a singular business entity would. This happens for a variety of reasons. Sometimes these companies compliment each other when one provides expertise critical to the enterprise that the other does not have. Sometimes multiple companies are needed to tackle a project of a certain scale. When businesses partner to work towards the completion of a particular project, each company’s exposure to liability as a result of the enterprise needs to be considered. Companies can either choose to retain each of their separate legal identities throughout the venture or form a new legal entity where the parties decide to work as one organization until the completion of the project.
The most common way two separate businesses collaborate on an enterprise is by forming a Joint Venture (“JV”). A JV is a business arrangement where at least two companies agree to pool their resources for a finite time to fulfill a common objective. A JV is created by contract and its terms describe the relationship between the parties with respect to how they each share in the profits, losses, and liabilities that result from their combined efforts. Each party is joint and severally liable for activities committed by the JV. A JV usually addresses liability through the purchase of insurance. Depending on the activity, insuring the endeavor can become quite complicated and expensive.
Arts companies can also form new business entities like Limited Liability Companies (LLC’s) or Corporations. Forming a corporate entity shields the personal assets of the people running the organization. Any liabilities that are the result of business operations will be satisfied from the company’s earnings. Each state proscribes how corporate entities can be established within their jurisdiction. Usually a corporation or LLC is formed by filing an Articles of Incorporation with the Secretary or Department of State. Corporate entities also have to file By Laws, which are the organization’s internal governing document with the Department of State. In addition, corporate entities must comply with certain formalities like holding regular meetings, keeping records of these meetings, as well as electing officers and a board of directors.
Most arts companies that collaborate on endeavors choose to form JVs. JV’s are easier to establish and dissolve. Each company continues to earn its own revenues while paying their own taxes. The only formality required is the drafting of a JV agreement. The JV agreement can specify customized splits with respect to how profits and losses will be divided, however, parties to a JV will always be joint and severally liable for the actions of any member of the JV. For this reason, each party to the JV must ensure that they have a sufficient level of insurance for the endeavor they are undertaking.
Two or more companies usually form a corporate entity for additional liability shielding on high risk endeavors where the purchase of additional insurance is costly. New entities are also formed on collaborative projects between companies when there is a need to hire personnel for the joint effort or when the project, once completed, can be sold along with the corporate entity for a substantial profit. The profits and taxes of the new entity are separate from those of the constituent collaborating companies, which makes it easier to value as a commodity.
Film is an industry where new corporate entities are formed to aid in the completion of artistic projects because of the inherent risk of the enterprise. A film maker will typically own a development company which they operate in order to acquire screenplays. When the screenplay has been worked up to the point where the project is ready to move forward, a production company will be established as a separate corporate entity. The development company (which the film maker manages) often runs the production company offering a double layer of liability shielding to the film maker and the film maker’s other properties. In addition, investors typically fund the production company devoted to the specific project they have interest in, which ensures the investor knows specifically where their money is going while protecting the investments of other investors funding other projects by the same film maker owned by different production companies. This separation of corporate entity by project helps the film maker license the movie, short film, or documentary to a potential distributors because the product is legally distinct from the film maker’s other projects and can be valued.
That said legally memorializing endeavors by arms length companies (companies without related management) are too complicated to achieve through the formation of a new corporate entity. For most arms length arts businesses, a JV is the best way to set forth the terms of how profits, losses, and liabilities will be allocated between companies for the duration of an enterprise.