LEGALLY SPEAKING, IT DEPENDS: The Businesses of Show Business

Christopher Schiller is a NY transactional entertainment attorney who counts many independent filmmakers and writers among his diverse client base. Follow Chris on Twitter @chrisschiller.

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Having just created a new, little company to facilitate my short film currently in pre-production I thought it was time to touch on a potential point of confusion and misunderstanding often overlooked by writers and others in dealing with the various entities and people they meet along the way. That is the various ways that different types of businesses do business in this business. Keeping straight what each type of entity you can encounter is able to do, how their structure influences how quickly they can decide about and do things and how flexible they can be when dealing with projects will alleviate a lot of confusion and prepare you for the unseen obstacles that are part of the infrastructure you’ll be navigating.

LEGALLY SPEAKING, IT DEPENDS: The Businesses of Show Business

Legal Entities (i.e. types of businesses)

Governments usually allocate a lot of rules that restrict the various company types and organizational structures you will encounter. And there’s a purpose. When parties agree to enter into contractual agreements there needs to be a way to be certain just who is on either side of the table. If there is a problem or disagreement there needs to be a legally distinguishable way of holding a guilty party responsible and awarding the harmed party damages. That’s simple enough when the parties are individuals representing themselves and their actions. But when you are dealing with a company, how do you keep it accountable and determine who is to be responsible for its actions? That dilemma is the basis for why the law has created the fictional but functional concept of “legal persons” of which companies are a subset. (If they weren’t “persons” then you wouldn’t be able to sue them, hold them accountable for their actions and it would complicate a whole host of non-ideal situations because of how our laws are designed to resolve disputes and enforce strictures.) There are a ton of rules to define the who’s, what’s, and how’s of company responsibility and liability.

What’s in a name?

When it comes to companies, a lot, it turns out. One of these rules is nearly always a restriction on what can or can’t be used as a name or part of a name. This allows the savvy person to tell at a glance what kind of business entity they will be dealing with.

You may have noticed, I used the term company quite a lot in the previous paragraphs. I’m using it as a generic term here, and for the most part that works with any business you are dealing with, where you don’t know their particulars. (Of course, there are exceptions so the general “it depends” caveat is a given.) It’s a good enough term to refer to any entity with a formalized, governmentally recognized structure doing business.

How many different types of business entities can there be? Tons. As any reasonably accurate list can tell you, every country has it’s own spin on the organizational types of most interest to them. They are often distinguished by an acronym or appendage of letters somewhere within the company’s name to signify which kind they are. You could see: Inc., Incorporated, LLC, Ltd., Limited, EEIG, GmbH, plc and many, many, many more. It can get very confusing and lead to misunderstandings even for those who are paying attention.

So what do they all mean and how does it impact me?

Let’s imagine a typical meeting you might have. You sit across from the principal person you’ve been negotiating with to sell your script. All the terms you want have been conceded and that person across from you is smiling. She reaches over and extends her hand to shake on the deal. Great. Now what? What has just been reached and how things proceed can vary considerably depending on who or what she was representing from her side.

The basic business types breakdown

The most direct “company” to deal with is the single individual working on their own for their own interests. This is considered a sole proprietor or individual legally and any decisions or commitments made by them are their responsibility to live up to or fulfill. These are the most direct and immediate line of transaction, but, also carry the caveat that it is easiest for a nefarious, single individual to disappear without a trace.

The next level of “company” are partnerships and their various variations (e.g. a joint venture is a partnership with a limitation that the partnership will only last the life of a single project, or venture). Partnerships are collaborative ventures between two or more entities with more or less equal responsibility and authority among the partners. Typically, all partners have equal authority to enter into deals and any partner can bind the partnership (and thereby the other partners) to a negotiated deal. Though it can be mitigated with how the partnership is structured, the multi-headed nature of partnerships can lead to some conflicting decision making and commitments that are not fully supported in spirit if stuck to by letter of the law. A single partner can disappear after getting the partnership in trouble and the remaining partners will be responsible for abiding by the commitments made by the absent partner.

For partnerships and all levels of business structure that involve more than an individual, you have to be careful to note that the persons you are negotiating with can have multiple interests. There will be the organizational interests they are supposed (and are often fiduciarily bound) to represent and they can also have their own, personal agenda that might conflict or not necessarily align with that stance. Making sure which hat they wear when in conversation with them will help keep clear whether you are dealing with the individual or company’s interests.

While individuals and partnerships are not technically companies (hence the air quotes above) there are other multi-individual organizational structures that you may deal with that do not fall into the typical thought patterns of “company” as well. Examples of these are unions and guilds, co-ops, associations, and agents operating for the interests of others. It is best to keep aware of the differences in their structure when considering what to expect and how to deal with them.

Companies proper

Next we come into the company types proper. What distinguish these levels are the required formalities and reporting structures that governments impose. Up to this level the investors in the “company” were the direct beneficiaries of the organization’s actions. From here on there can be separation between the financial interests and the active management of the company.

The loosest so structured entity is the limited liability company and its variations allowed by nearly every jurisdiction. They typically have some formalized, governmental responsibility and reporting structures required to enable the separation while protecting the more distant financial parties interests. This is typically distinguished between the members, or owners of the company and the managers, the ones who run the company. Of course, there are mixing of these parts where members can take some active participation roles and managers may also be members. When dealing with LLCs you should try to keep clear the interests of the party you are dealing with. If they serve in multiple roles you might need to distinguish from which one they are speaking. And never forget the personal interests they may have as well, apart from their fiduciary responsibilities.

Much more formally structured and controlled (at least in theory) are corporations. There are lots of variations within the corporate structure model but they mostly run along the basic tenet of a complete separation between owners (in the usual case, stockholders) and management (typically, presidents, CEOs, etc.) who run the business. The government rules are in place and are very strict because of the vast separation between the owner’s money and how the company operates. A stockholder has very little ability to control how the company he or she owns runs. In a publicly traded company (one where the stock can be freely traded on an exchange) they are usually limited to an annual stockholder’s meeting where occasional big issues can be targeted or “voting with your feet,” selling your stock. In a close corporation (where the stock is restricted from trading, either by not being on a stock exchange or only available to a limited number of particular stockholders, for example) the owner desires are even harder to force onto the company management. The government recognizes these separations and places heavy burdens of responsibility and reporting in place to keep things in check. In the corporate environment the individual you deal with could easily be replaced or disappear from the picture and the corporate wheels would keep rolling along. That could be good– or bad– for you, depending.

Your expectations and interactions differ with different company types

As you can see there can be a quite complicated structure behind the person sitting on the opposite side of the table from you when you take a meeting. As you can imagine, that structure may change considerably what you can expect and how you interpret what is said in that meeting. Knowing this will keep you from being as frustrated or misinterpreting what is promised, or at the very least, knowing who to blame or sue when things go wrong (not that they ever do, right?)

Authorization

The first thing you need to clarify is whether the person you are speaking to is authorized to speak for the company you want to be dealing with. Just because they work for said company doesn’t automatically give them actual authority to commit that company to the deals you want to be making. Titles don’t always convey full authority to negotiate every deal. And even if the person across from you has some authority to commit to certain parts of a deal doesn’t mean that they can bind the company to every issue discussed. Case in point, you may negotiate to have “written by” credit and the company representative agrees. But that company is a WGA signatory and, in a dispute for credit, has to abide by the arbitration decision the WGA decides. So the “personal guarantee” the person gave you that you’d get writing credit overreached his actual authority (in this case, third-party contractually restricted). Common sense and clear headedness will be able to serve a lot of these questions, but, when in doubt don’t shy away from getting clear clarification and assurances that real authority is behind the commitments they’re making to you.

And don’t forget you have some authority issues yourself. If you have an agent, you have likely authorized that agent to represent your interests on your behalf. Just what interests you have authorized need to be clearly defined and expressed to the negotiating parties. It is possible to have separate agents for different kinds of work and you wouldn’t want your TV writing agent to be committing you to theatrical deals without your consent.

Authority is an easy question when you are dealing with the person in charge. If meeting with an individual or general partner (a partner not restricted or limited in what he or she can bind the partnership to) then what they say goes (and you can keep other partners committed to the promises of one of their own.) If you are dealing with a limited partner (a partner with restrictions on what they can speak for the partnership for) or a manager of an LLC then you have to find out if that person’s authority granted by the company structure allows them to negotiate with you. Just because a LLC representative is a manager doesn’t mean that manager has all the authority to speak for the company. A company representative’s authority can be limited in scope. Also, as you get more abstracted from the power/control nexus you have to consider whether you are having a conversation with the representative or the person. A discussion at a dinner party with a manager of an LLC expressing interest in the film concept you just talked about over drinks might not have been a company commitment when she said she thought your idea was interesting. She may only have been being a polite guest.

When you get to the level of corporations, you may not be able to get a firm commitment from the person sitting at the table with you until the decision has been approved by the management structure above them. There are a lot of meetings that may need to be taken by each level of higher ups before the company will actually be committed to the agreed in principle meeting. And because corporate makeups change all the time you could find yourself in a situation that your deal outlasted the advocates you found within the corporate structure and the new blood wants different things. Also, creative decisions that make sense might not make it through the chain when the fiscal decision making comes more into play.

Negligence, bad faith and other complications

At all stages, there can be bad dealings done by parties who should have known better or overstepped and overcommitted on behalf of their companies. If these misdeeds rise to the legal level of negligence or bad faith you may have recourse going after the doer as well as or instead of the company. But those same strictures that protect the shareholder’s interests work for the individuals within the corporate system, so that a bad decision made in good faith or in error, can protect the doer from being held responsible for it. And the corporate structures also allow compartmentalization of assets and responsibilities which usually separate the financial resources of a large corporation from each project element. For example, if a single film project were mishandled to the state of losing all its money those damaged by those actions would be blocked from pursuing the larger corporate structure who still had assets unless the way the corporation ran it’s separation of business issues wasn’t fully insulated. If the company wasn’t careful or were sloppy only then could the damaged party pierce the corporate veil and get past the bankrupt company to the controlling interests above it.

And dealing with multinational ventures leaves the question of jurisdictional issues when things go wrong. International laws vary considerably and have great impact on resolution of issues when authority and actions of multinational companies are involved.

It’s all complicated and, as always, it depends, but being forewarned and asking for clarification will allow you the best understanding of the deals being offered by that individual across the table from you. Good luck.

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Christopher Schiller

About Christopher Schiller

Christopher Schiller is a NY transactional entertainment attorney who counts many independent filmmakers and writers among his diverse client base. He has an extensive personal history in production and screenwriting experience which benefits him in translating between “legalese” and the language of the creatives. The material he provides here is extremely general in application and therefore should never be taken as legal advice for a specific need. Always consult a knowledgeable attorney for your own legal issues. Because, legally speaking, it depends... always on the particular specifics in each case. Follow Chris on Twitter @chrisschiller, his website, and Google+.

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