Tips of the Trade:

Film Financing (Different Methods)

Video Tips

• Film Financing

The list below represents a number of ways in which films have been and are financed. Some, of course, are not recommended.

1. Obtaining a Check from a Studio. This is highly unlikely for your average independent filmmaker.
2. Credit Cards. One Hollywood movie was totally financed by credit cards and went on to make money, as well as a career for its producer. Not recommended.
3. Selling your Body for Scientific Experiments. One motion picture was reportedly financed in this manner. Not recommended.
4. General Partnerships. A group of producers can get together, put up their own money, form a partnership, and make a movie. This is not recommended due to the fact that producers generally do not put up their own money to make motion pictures. Also, with any general partnership, if one partner creates liability for the entire partnership, all partners are individually liable for the whole amount. Therefore, you do not want to be the "rich partner".
5. Family and Friends. Not recommended. This could damage personal and familiar relationships.
6. Bank. These funds are usually only available after equity or other financing (i.e. presells) is in place, a distribution deal has been found with sufficient collateral and completion bond has been established. Furthermore the bank's very high rates, points and fees have to be paid. Also bank funds are the last money in and the first money out. Such loans are extremely difficult to obtain and can only be used in conjunction with other financing, not as the sole source of financing for a film.
7. Limited Liability Company (LLC). An LLC is a legal entity formed under a statute, other than a partnership or a corporation statute that allows an association of owners (and in some states, one owner) to carry on business with none of the owners having liability for the obligations of the business. The LLC creates limited liability for its owners (like a corporation), freedom to structure management rights and financial interests in the entity in virtually any configuration the parties wish (as in a partnership). The LLC will be treated as a partnership for income tax purposes. The income, gains, losses, deductions, and credits of the LLC generally will flow through to its members for reporting on their personal tax returns. An operating agreement or member agreement sets forth the agreement of the members of the LLC much in the same way a partnership agreement sets forth the agreement of the partners . These agreements provide terms regarding capital contributions, profit and loss distribution, shares of distribution, management and voting rights. However, it may well be that the limited partnership is the better vehicle.
8. Limited Partnership. The limited partnership may be a preferable film financing vehicle, as the partnership can be structured to provide maximum return for the producer while limiting the producer's risk of potential loss and liability. A limited partnership consists of two types of partners. The first are the limited partners who are the investors. The investors only lose what they invest in the project and are not liable for any losses over and above their investment (except when unusual conditions exist as when a limited partner attempts to engage in running the business, in which case the limited partner can run the risk of becoming a general partner.) The limited partner generally has no say in the day-to-day operations of the project. The other partner is the general partner, which is the producer or production company. The producer puts up no money, but bears all the risk. The producer's potential liability is unlimited to the limited partners and to the outside world, should the partnership be sued. The upside is that if the film is a financial success, the general partner reaps great profits without investing his or her own money.

Even though the producer as general partner bears all risk, the producer can be protected from liability by setting up the producer as a corporation to act as the general partner/production company. The individual producer(s) hold shares in the corporation. If the general partner is sued, only the assets of the corporation can be reached. If all corporate formalities and laws are followed by the shareholders, officers, and directors of the corporation, these individuals should not incur personal liability. This takes much of the downside risk out of being the general partner. The producer's personal assets are protected by a corporate shield.