This is a common scenario with a loan out company: Tom is a talented actor. He is a short-term employee of various production companies on film, television and other commercial acting gigs. He is accustomed to being paid as an employee. All of his wages are subject to self-employment tax (Medicare and Social Security tax).
Because Tom makes more than $100,000 per year acting, he could benefit from forming a new company. The company would “loan out” his acting services to the production companies for which he works. This one-person company arrangement for the personal services of its owner is called a Loan Out Company.
By having his own business, he is eligible to make an “S-election” with a corporation or a limited liability company to reduce up to half of his self-employment taxes for the social security portion, potentially saving him thousands of dollars per year. This can be done by (i) paying out half the profit after deductible benefits and expenses as salary subject to the combined 15.3% Medicare and Social Security Contributions and (ii) taking out the other half of the profit as Subchapter S Dividend not subject to the 12.4% Social Security contributions. Outside the entertainment industry, the same arrangement can benefit other workers. This includes those who work a series of short-term employment engagements, like consultants.
What Is a Loan Out Company?
A Loan Out Company turns short-term employment arrangements into independent contractor relationships. People with unique talents can benefit from tax reduction and asset protection by forming a company. Some common examples include Hollywood actors, musicians and writers who contract with movie production companies or concert venues. Other examples may include newer “gig economy” type workers. These include people who sell their services through channels where services are loaned out to third parties obtained through a mobile app. For example, a registered nurse who uses Care.com to find patients for her elder care service could form a Loan Out Company to contract with patients directly.
Who Owns a Loan Out Company?
The individual selling their talent is typically the person who owns the loan out company. Today, the most common type of entity used is an LLC. The individual typically serves as both the sole employee and the President/CEO. Loan out companies are being used by a wide range of people in the entertainment industry, including YouTubers, professional athletes, and film, television and theater actors.
How Is a Loan Out Company Structured?
A common structure of a Loan Out Company is a single-owner LLC that elects to be taxed as an S-Corporation. The Loan Out Company is essentially an intermediary between the individual with talent and the third party wanting the individual’s personal services. A Loan Out Company is not a different type of entity, like LLC or corporation. It is just a way to describe a single owner company whose purpose is to improve asset protection and provide tax benefits for an individual employed through short-term engagements.
Loan Out Company Benefits
Forming a Loan Out Company is a good idea for people who earn $100,000 or more per year through a series of short-term engagements. At that level of income, the tax savings more than pay for the administrative costs of the LLC. A Loan-Out Company can reduce the entertainer’s effective tax rate. This is largely because part of the actor’s income can be exempted from self-employment tax.
A Loan Out Company also affords the entertainer a greater degree of asset protection from contract liability than being an employee or sole proprietor. For more protection against personal injury liability, insurance can be obtained by the Loan Out Company. The entertainer’s personal wealth should be kept separate from the the Loan Out Company. A separate bank account should be opened for the income and expenses of the Loan Out Company. Contracts should be entered into in the name of the company with the manager signing in the signature block. A separate contract should be maintained between the Loan Out Company and its owner for the owner’s personal services in case of a lawsuit, audit or questions by a production company.
Anyone interested in determining the amount of savings should seek out the assistance of a tax advisor. The tax advisor may suggest the Company also consider a C-Corporation tax election. This may achieve a lower tax result under the 2017 tax act. If applicable, creative people should ensure that their Loan Out Company does not result in the transfer of copyrights for creative works. This arrangement is not an alternative to long-term employment for ordinary employees, just those in the gig economy.