Loan Out Companies: Lessons in Use of Corporate Forms
A recent case involving Mariah Carey and her loan out company gives us the opportunity to discuss the advantages of using corporate forms — in this case, using a loan out company. See Mirage Entertainment, Inc. v. FEG ENTRETENIMIENTOS S.A., Case No. 18cv581 (US Dist. SDNY August 29, 2018). Mirage Entertainment involved a dispute about Carey’s cancellation of the final leg of a concert tour that was scheduled for various dates in 2017 in Argentina and Chile. Carey owns and operates what is called a “loan out company” called Mirage Entertainment, Inc. (“Mirage”). Carey serves as Mirage’s Chief Executive Officer and is the company’s sole shareholder.
San Diego Corporate Law: What is a Loan Out Company?
A loan out company is a corporate entity that is created to handle the details of contracting for performances by an artist, musician, or other performer. The loan out company hires the artist, musician, or performer as an employee and then “loans out” the employee for performance tours or for roles in movies or plays or whatever the particulars. Often, there are other employees, too, and they generally make the specific arrangements and provide other personal services for the artist involved. See here for Forbes.com article on loan out corporations.
Of course, loan out companies can be used for any type of temporary work and, in the new gig economy, loan out companies are becoming more common. Loan out companies are often LLCs, but they can use other corporate forms such as a C-corporation or an S-corporation. Generally, the S-corporation is chosen since typically, the artist wants the tax benefits of having a “pass-through” corporate entity. If an LLC is used, typically the LLC makes the election to be treated as an S-corporation for tax purposes.
There are many advantages for an artist in using a loan out company including:
- Privacy: Once formed, the corporate entity will obtain its own tax ID number, will have its own bank account, and will almost always have its own separate offices, phones, email addresses, and more. All of this provides a huge shield of privacy for the artist; no personal social security number need be given — the corporate entity provides its tax ID number; likewise, with personal addresses, phone numbers, and bank account numbers.
- Protection from being sued: Since the loan out company is making the contracts, any breach of those contracts is legally a breach by the company, not the individual performer. This allows the performer to avoid being personally involved in litigation. Ms. Carey’s lawsuit is a good example. At one point, she was sued personally in the case, but her lawyers filed a motion to dismiss her personally from the case. All the contracts at issue were signed by Mirage; Ms. Carey was not personally a party or a signatory to the contracts. Ms. Carey’s lawyers pointed out to the judge that the law is clear that a nonsignatory to a contract cannot be named as a defendant in a breach of contract lawsuit. Since there was no allegation that Mirage was a sham or fraudulent corporation, the judge agreed and dismissed Ms. Carey from the case.
- Protection of personal assets: In a similar way, having a loan out corporation protects the personal assets of the performer. If there is an accident like a slip and fall or a vehicle wreck, only the assets of the company are at risk for any judgment if there is a lawsuit; not the personal assets of the performer.
- Some tax benefits: There are also some tax benefits associated with having a loan out company such as deductions that can be made by a corporation that are not allowed on a personal tax return. These include payments for medical insurance and retirement plan. There also may be tax savings in declaring corporate dividends instead of paying salary.
Contact San Diego Corporate Law Today
For more information or if you want to set up a loan out company, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard provides a full panoply of legal services including formation of corporate entities of all types. Mr. Leonard can be reached at (858) 483-9200 or via email. Mr. Leonard has been named a “Rising Star” for four years running by SuperLawyers.com.