Independent Film Producing by Paul Battista

Author:Paul Battista
Language: eng
Format: mobi, epub
Publisher: Allworth Press / Skyhorse Publishing, Inc. (Perseus)
Published: 2013-09-19T04:00:00+00:00

RULES FOR CREATING AN S CORPORATION

To this point the discussion regarding the corporation has been of a general nature covering both C and S types. The C corporation is usually avoided as the entity of choice for making a feature film primarily because of the two levels of taxation and the issues of control over the entity. This fact does not render a discussion of the general nature of corporate structure moot because there are filmmakers who create an S corporation when making their low-budget film. An S corporation is created by filing a request with the IRS asking to be recognized as such. However, before the election is filed with the IRS, a C corporation must have already been created. An S corporation still operates under the same laws as a C corporation, so the workings of the C corporation discussed above are by and large applicable to an S corporation. A primary difference is the issue of taxation; the S corporation allows the profits and losses to be passed through to the shareholders who then declare the profits or losses on their personal income tax returns.

To convert a C corporation into an S corporation certain requirements must be met which include the following: 1) the corporation must be a domestic corporation; 2) the corporation can have no more than seventy-five shareholders; 3) shareholders can only be individuals, estates, exempt organizations, and certain trusts; 4) none of the shareholders can be nonresident aliens; 5) the corporation can have only one class of stock; and 6) every shareholder must consent in writing to the S corporation election. After a C corporation is created in the state of choice, the filmmaker must obtain Internal Revenue Service Form 2553, fill it out and send it to the IRS.

Not all states recognize S corporations created on the federal level so a filmmaker should consult with his or her qualified attorney regarding his or her circumstances. The federal law requires that the election be made before the sixteenth day of the second month of the tax year in which the corporation first has owners, has assets, or does business. A failure to timely file the election means S corporation status will not go into effect until the next tax year. This fact is not without importance. If, for example, the filmmaker creates the corporation and does not file to be an S corporation in time, then for tax purposes, the corporation is treated as a C corporation for that year and is treated as an S corporation beginning January of the next year. Failure to recognize this small quirk has cost some filmmakers thousands of dollars. Imagine a filmmaker who creates a C corporation in April but fails to timely file his or her S corporation election. The filmmaker begins making the film in August of that year, spending $60,000 by the end of the year. The next year the filmmaker continues making the film and spends another $100,000 to finish it. The first

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