In everything, and particularly in the film business, the time comes when the show must come to an end. With respect to the single-purpose film limited liability company ("LLC"), that time comes when the opportunity for further monetary returns and the usefulness of the LLC has expired. It is at this time that the film producer asks the question, "Now what?"
In my experience as an entertainment lawyer and as film production legal counsel, film producers know a great deal more about forming and operating a single-purpose film LLC but almost nothing about closing one down. So here is a guide to help you understand the steps of dissolving and winding down a typical film production LLC.
1. When should you consider dissolving the film LLC?
When the film has run its course, has little opportunity to further generate revenue, and when the potential liabilities that were the basis for forming the LLC are no longer a concern because the statute of limitations has relieved the management and members from being under much risk of any potential claims. In such instances, the LLC is ready for dissolution.
2. How can you dissolve the film LLC?
You must first look at the LLC's operating agreement. If the operating agreement is silent as to the process of dissolution, you look to the state statutes. In California, an LLC may be dissolved by a majority vote of the members. If all members unanimously vote to dissolve the LLC, then you can skip filing the Certificate of Dissolution and instead file only the Certificate of Cancellation (see below). Regardless, Management should take care to follow the rules set out in the operating agreement or statute to properly initiate a dissolution and to seek the appropriate consent from the LLC's members, if necessary.
3. How to notify the members?
The decision to dissolve an LLC, although initiated by the Management, will not normally come as a surprise to the LLC's members. They will most likely already sense that the end is near and will expect such a decision by Management. Still, there is an art to notifying the members, including those members who invested in the film, particularly when the film may not have met expectations. Management should present the decision to them in a well-supported and objectively reasonable way, and it should explain the process going forward. Once the members are informed, a vote should be taken on the matter, if required. If a vote is not necessary, members should nevertheless be given the courtesy of time to digest the news and an opportunity to respond to it before Management takes any action. This courtesy could help keep members as potential investors for future projects.
4. Winding up.
"Winding up" means paying off the LLC’s liabilities and distributing assets to the LLC members according to the operating agreement. Typically, the film is considered an asset to be sold in the event of dissolution. Management generally puts the film up for sale to the public, allowing anyone to bid for and purchase the film (including investors and the filmmakers). Upon conclusion of the sale, as is common with LLC wind-ups, the proceeds from the sale would then be distributed to the members pursuant to the operating agreement, and the LLC could then be dissolved, subject to the filing of a certificate of cancellation, and the filing of a final tax return. However, should Management decide to sell the film, the filmmakers should try to carve out any future rights to enjoy the film in the limited ways they contemplate (i.e., right to limited exhibitions or screenings, right to use the footage in subsequent films, right to use in promotional materials, etc.).
5. Next Step: Certificate of Cancellation.
After dissolving and winding up the LLC, Management is required to file a certificate of cancellation with the State's Secretary of State.
6. Final Step: Tax Clearance.
In California, it is not required that you obtain tax clearance before dissolving your LLC. However, you do need to affirm in the certificate of cancellation that you have filed or will file, a final tax return with the Franchise Tax Board. A CPA could help you with this step.
7. Future revenue.
If there is any likelihood of future revenue from the film, Management should appoint a custodian to make sure those revenues are received and distributed at least annually among the investor members and others entitled to a share of those revenues.
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The information provided in this article is for general informational purposes only and should not be construed as legal advice or opinion. Readers are advised to consult with their legal counsel for specific advice.