Incorporate Now!

Anthropology may be “the worst major for a corporate tool” but that doesn’t mean that anti-corporate anthropologists shouldn’t consider incorporating. In this special pre-tax-day post I will take a break from my usual anti-capitalist blogging to talk about one particular instance where anthropologists might want to incorporate: if you are thinking of making a documentary film it may be just the thing for you.1

Many independent filmmakers register as either an S-Corporation2 or an LCC (a limited liability company) in order to protect themselves if they get sued3 by the subjects of their films. (Or from someone who claims to be harmed by the film or by the process of making the film.) Having a company helps protect your personal assets, such as your house or retirement savings, etc. from being seized if you were to loose the suit. Many independent filmmakers even set up separate LLCs for each film. Doing so, however, is a lot of work, and not without its downsides.

Besides protecting your assets, having a company can allow you to write off some of your expenses. For instance, if you have a home office you can calculate how much space your office takes and deduct a similar portion of your rent and utilities. However, since you are reading this you are probably not the kind of filmmaker who will make any money from your films and the IRS does not look kindly on companies that don’t make a profit within three to five years. You may find yourself forced to reclassify your business as a “hobby” or even be subject to an audit. For this reason many academics never bother to incorporate. But, being married to a filmmaker I’ve learned that things are never so simple:

The primary determinant is your ability to make a profit at what you are doing. If your efforts result in a profit in three out of five consecutive years, your activity is presumed not to be a hobby by the IRS. If you don’t meet the three-out-of-five years profit rule, is all lost? Not necessarily, if you can prove to the IRS’s satisfaction that you have made a genuine effort to earn a profit and that the reason you are not successful is related to special circumstances, the IRS might agree that your art is, in fact, a business. This is often true for individuals engaged in the arts, where profits and successes are difficult to achieve. To increase your chance of gaining the IRS’s recognition of your business, I recommend that you run your activity in a professional, businesslike manner. Doing such things as having business cards and stationery printed, maintaining a separate business checking account and telephone number, keeping accurate records of the time you put in, and carefully documenting all business-related expenses. The Internal Revenue Service places great credence on computerized accounting records as evidence of the artist’s “businesslike” intent. Keep records of all show entries (even including ones that you don’t get into) and all gallery activity. In short anything related to attempts to sell your artwork.

(Also see here for more on the filmmaking as business vs. hobby distinction.) In the end, no matter what kind of company you set up, it is possible that any tax write-offs you get might be erased by the increased costs associated with hiring a professional to hire your taxes. Nonetheless, it still might be worthwhile incorporating simply to protect your assets, especially if you make a film that might someday be on television or in the theaters where it will attract a lot of attention. And if you make a lot of films, you may find that a lot of your expenses are film related perhaps making the extra costs and hassles associated with incorporation worth your while.

UPDATE: Clarified that subjects of the film aren’t the only people who might sue the filmmakers.

  1. Please note that I am not a legal or financial expert and that what you are reading here is simply received wisdom in the documentary film world. Please check with an expert before making any important financial decisions. 
  2. We chose an S-corp for Four Nine and a Half Pictures because it is a lot less paperwork and better suited for a smaller company without multiple investors. 
  3. Protecting yourself from a lawsuit doesn’t mean you don’t need to act ethically. But ethical and legal responsibility may not always be the same thing, so it is good to protect yourself.