By: Matthew Kwatinetz

Last month, I laid out three assessment factors for determining whether to start a new legal entity: liability, funding and control. This month I am going to focus on a discussion of liability as it relates to legal incorporation. Please note first of all that I am not a lawyer, and the opinions herein are not legal advice. You should consult with a lawyer in any decision involving liability, entity formation, or other legal issues. What I’ve written here is meant to help you as you consider your options for starting an organization.

Legal liability is often referred to as exposure. A legal liability is loosely defined as “a situation concerning property, body, or reputation in which a person is responsible for paying compensation for damage incurred” (adapted from Wikipedia). For Producers, liability refers to the worst case scenario: what is the maximum potential loss that can be experienced if absolutely everything goes wrong—that’s your exposure.

You can limit certain types of exposure through good business practices—paying your taxes helps avoid penalties and interest; instituting financial controls such as safes and daily bank drops limit exposure to theft; utilizing security may reduce exposure to violence. Some types of exposure are more difficult to limit: such as power outages which force you to cancel shows, or other acts of nature. The savvy producer will likely obtain insurance to protect against as many situations as possible—this increases cost but limits potential risk. It usually takes just one catastrophe that could have been recovered through insurance to convince thrifty producers of the value of a good insurance broker.

What does all this have to do with forming a legal entity? Well, if you are producing an event, and are not doing so as an agent of an organization, by default you are personally liable for the exposure. That is, if there are bills to pay and nobody to pay them, your personal assets might be at risk. If the venue, a customer, a neighbor decides to engage in a law suit, guess who they are going to sue? Surprise number two: if you are in a partnership with another person/entity, then you are also responsible for their liabilities—if they default on a payment, you might be called upon to make good.

Producers form entities to create a layer, or “veil”, of protection from this liability. Without this veil, your personal assets (bank account, car, house, etc.) are at risk. With this veil, only the entity’s assets should be at risk. Note that liability protection can also be obtained through engaging with a fiscal sponsor, umbrella organization, or working as a project of another organization. Insurance protects you to a certain degree—but insurance runs out, and once it runs out, the producer (entity or person) is next on the list.

In a single event, your exposure can (and should) be calculated based upon the size of audience, the scope of budget, the number of artists/staff involved, the life/fire safety of the venue (exiting, lighting, etc.), the type of performance (anything potentially dangerous?), whether food is served, etc. If you accept investment or receive grants, your exposure also includes promises made to funders—if you do not execute your promises, or if you misrepresent your intentions, you are liable to return the monies.

Once you engage in an ongoing performance, the liability exponentially increases as a factor of the increase in number of performances. After all, Murphy’s Law tells us that given enough time, if something can possibly go wrong, it will. Our producing experience tells us that things will go wrong even when it seems impossible for them to. That’s show business. The question becomes: how well will we deal with it when it goes wrong, and is there the potential for actual exposure in terms of finances and/or safety?

The business of producing is often referred to as a “hits” business. It is a business based on “striking it big” every once in a while, having a “hit”. Although all businesses involve an element of chance and timing to be successful, producing seems to require even more of this than normal. In thinking about liability, it may be helpful to ffllip the coin and say that producing can often be a “miss” business. The question of exposure then becomes: how much are you able to miss without adversely affecting yourself or those around you? Getting protection through joining an entity, acquiring a fiscal sponsor, forming an entity, and/or acquiring insurance is your protection against adverse affect.