Production Company structure options - Page 1

I mentioned some ideas about setting up a production company in order to complete the Side Project that I want to do.

In this article, I'll expand on those ideas and document a few issues that will have to be handled at some point in the organisation's lifetime.

Background

For a start, I don't intend to set up a traditional production company that has access to typical funding, equipment, etc. Instead it will be largely based on people being involved on a voluntary basis and rewarding involvement if the money's there to do so. Unfortunately this is as far as many get. Read around on a variety of creative sites and you'll see a number of projects that either remain a pipedream, are based on dodgy foundations (e.g. one person could scupper the organisation) or revert back to one person, perhaps involving a couple of close friends.

I want to move beyond that. It works in other industry sectors so it should be able to work in this sector with some modification.

The main issue I see again and again relates to how much time people put in and what they expect to get out of it. In the back of my mind, I'm always curious about the legal structure and implicit contracts between the people that are involved.

Here are some options:

Option 1) Everybody receives a share of the profits

Once a group figure out they need a structure other than working as friends, this seems to be the logical first step. It's a common set-up, but relies a lot on trust and assumptions. It has some issues with investment within the organisation and from without. A lot of people may sign-up to what looks to be a good organisation (and still may be a good organisation) only to find that the profits don't materialise despite some people making money out of it.

Benefits:

Fair
Looks good on paper
If the movie or series of movies don't make a profit, then neither do those involved, so no expectation of payout
Should help motivate members into pushing distribution
Can apportion the share according to the effort/talent involved

Concerns:

Accounting can find ways so that the movie never makes a profit.
What happens when the production company makes more than one movie, how to allocate funds, accrue debt accordingly?
The first production will get hit with a lot of the cost (e.g. buying cameras, editing suites, etc), so profits will be a long way off
How to accommodate external investment

Option 2) Some roles are salaried, everybody receives a share of the profits

A step up from option 1, this usually entails the main people who drive the project forwards recouping a small salary or fixed payments out of the organisation before profits are calculated. Again, it appears to be a logical step forwards, ensuring that those that put most in receive an fixed payment for their efforts. If the organisation returns a profit, then I guess it works. Do you have an example of this structure working successfully?

Benefits:

Fair for the people who are putting a lot of time in
Looks good on paper
Means that the salaried members are protected from the lack of effort/talent by the non-salaried members
Should help motivate members into pushing distribution
Offers an incentive for non-salaried to find salaried positions
Can apportion the share according to the effort/talent involved
Creates continuity in the organisation

Concerns:

Creates a divide between the salaried and non-salaried
The non-salaried may give up earlier
Accounting can find ways so that the movie never makes a profit.
If the project doesn't make a profit, then the non-salaried members are working to pay the salaries of the salaried members
What happens when the production company makes more than one movie, how to allocate funds, accrue debt accordingly?
The first production will get hit with a lot of the cost, so profits are a long way off

Option 3) Everybody receives a share of the revenue

By saying that the share is out of revenue, it reduces the risk of the production company accounting classing the project as a loss and the members receiving nothing. It means that anybody who contributes receives a share. It still may be a small amount, especially for the projects being funded by add-on advertising. It may be good to provide small shares with this model so members get paid, but get paid less (for the advantage of getting paid earlier).

Benefits:

Even if the movie makes a loss, members will get paid
Earlier payout for members
Better motivation for members

Concerns:

Production company will quickly end up in debt paying out from revenue without recouping costs
Less money for the production company to reinvest in future projects
Members do the minimum to get their share and no more (isn't that a potential risk in any structure though?)
How can the organisation afford to purchase kit?

Option 4) Split the revenue into 50% going to costs, 50% to share

A variation on option 3 where the production company has a better control over what comes in and what goes out. The 50% figure is arbitrary for this, but initially seems a good place to start. Your experience may suggest a different figure. This mitigates some of the risk that the company has in paying out from revenue (e.g. also having to pay tax, costs, debts).

Benefits:

Even if the movie makes a loss, members will receive some payment
Earlier payout for members
Better motivation
Production company receives revenue to pay off costs

Concerns:

Production company may still end up in debt paying out from revenue without recouping costs, but is less likely
Members do the minimum to get their share and no more (isn't that a potential risk in any structure though?)

Option 5) Everyone salaried or contracted

Perhaps the most typical professional setup where the production company cover the costs of hiring staff or contractors to do the jobs.

Benefits:

Control over professionalism and quality of products due to contractual nature
Very early payouts for staff/contractors, regardless of project's profit
Clearer ownership and copyright position
Greater potential for profit for the production company

Concerns:

Way beyond the reaches of startup companies due to the funding required
Payouts for members may be less than a percentage share if the production becomes a success
Less feeling of membership

Option 6) Everyone salaried or contracted, 3rd party funding

Benefits:

Control over professionalism and quality of products
Very early payouts for staff/contractors
Continuity of payments due to 3rd party

Concerns:

Way beyond the reaches of startup companies due to the funding required
Potential lack of control as the 3rd party encroaches on decisions (in case of investors)
Less feeling of membership
Direction set by 3rd party fund directors (in case of investors)
Someone has to be responsible for pay back the funds (in case of loans)

Option 7) Full co-operative

I really don't know much about formal co-operatives. I'll have to have a look into this more. I'll post updates to this as I find out more.

Option 8) Purchase

An option is that everyone has to become a partner where they invest an amount to become a partner. Provides the organisation with capital to purchase equipment and service. However, it's probably a bad idea to set-up a true partnership due to the equal liabilities involved unless you know the other partners very well. Look elsewhere for advice for benefits and pitfalls of legal partnerships.

I can see some benefits to members having to invest. Let's say that each member had to invest a few hundred pounds. That'd mean that you should only get people who are more committed, believe it will work and the organisation would have some initial capital. If it doesn't return a profit, it makes it more awkward and how do people leave the organisation, etc.

A better idea may be that a person buys the equipment, e.g. a microphone, a camera. They retain ownership of that equipment and can take it with them when they leave, no matter what it is. By default they probably become the operator of that equipment as well, although there may be a good case for others using it (depends on how well people get on).

Benefits:

provides well-needed equipment to the project
flexibility
new kit provides stimulation for new ideas

Concerns:

Avoids pitfalls of joining and complex leaving
If a person leaves and takes a necessary piece of kit with them, then it will need to be replaced
Can't really do this with services
need to understand who maintains the equipment (the person or the organisation)
different current and future values of kit: electronic equipment/software will be worth less in 3 years than a camera lens
organisation will still probably require capital
if the owner is no good at operating the equipment, who's going to tell them and what's the solution?

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