As attorneys who represent athletes, we need to make sure that we are exploring every available avenue that is in our clients’ best interests. One of these avenues that has presented itself is the creation and maintenance of loan out corporations.
A loan out corporation is a company that is set up as a separate legal entity from the individual, which provides an athlete with legal protection and tax benefits. These loan out corporations can be in the form of C Corporations, S Corporations or LLCs (limited liability companies). Each corporate structure has its advantages and disadvantages, thus it is essential to be aware of which structure is best suited for the individual athlete.
Once the loan out corporation (or company, when an LLC is the corporate structure used by the individual) is formed, the athlete may create a contractual relationship with the loan out corporation by becoming an employee of the corporation. In turn, the corporation contracts with third parties for the athlete’s services. After the contracted services are performed, the corporation receives the agreed fee and the athlete receives his or her salary from the corporation.
There are an array of benefits that athletes receive from forming a loan out corporation. First, the expenses incurred from the services performed by the corporation are deductible, because the athlete is just an employee of the corporation. Alan Kufeld, a recognized tax authority and partner at Flynn Family Office, explains “Because loan out corporations are separate legal entities, the personal wealth of the entertainers is protected from liability connected to the corporation.” Further, athletes can set up qualified plans like a defined benefit pension or a 401(k) savings plan through the corporation. However, due to the complexities, it is recommended that the athlete work with a tax expert to ensure that he or she complies with all applicable tax codes.
HEITNER LEGAL can discuss the benefits and detriments of starting a loan out corporation with any interested athlete. Additionally, we can discuss the advantages and disadvantages of forming a C Corporation, S Corporation, or LLC and we are equipped to guide any athlete through the every step of the process of starting a loan out corporation.
Resources:
Russ Alan Prince, What is a celebrity loan out corporation, Forbes (Oct. 27, 2014, 6:26 AM), http://www.forbes.com/sites/russalanprince/2014/10/27/what-is-a-celebrity-loan-out-corporation/
Howard J. Weiner, Tax considerations for athletes and entertainers, American Bar Association (Apr. 22-24, 2010) http://www.americanbar.org/content/dam/aba/migrated/Forums/entsports/PublicDocuments/taxconsiderations.authcheckdam.pdf
George G. Short, The loan out corporation in tax planning for entertainers, 44 Duke L.J. 51, 51-52 (1982) http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=3639&context=lcp