Net Profit IllusionThe term “equity” relates to an investment that represents the interest of an owner in a company; for example, units in a limited partnership, membership in a Limited Liability Company (LLC), or shares in a corporation.  It is a different aspect from that of a loan facility, in that you are obligated to refund the money borrowed from a lender, with agreed interest.  Equity is a situation whereby if the company fails to make money, so does an investor!

In the world of filmmaking, “net profits” usually are regarded as something of an illusion but, they do exist! When this occurs, however infrequently, investors – who usually include directors, producers, writers and leading actors – expect to benefit. How is a net profit is determined? This is an important question. In the majority of business scenarios, it is a simple question of deducting what you have spent from the earnings, but in Hollywood, the scenario can be more original!

In the film industry scenario, net profits could be considered an art form that changes with each transaction. Simply put, they are what the parties to a contract decide they should be. With a film studio, the definition can run into many pages; add to that the complexity of the determining formula used, from being an independent film-maker, to a major producer or studio.  Let’s see how the former operates.

If you mention the phrase “net profits” in the film industry, you could be questioned as to what type you are referring to . Do you mean the financial return from a distribution aspect, or the net profit made by your production company, with all the costs deducted? There are two basic factors related to this issue, with the first being the money given to the production company after deduction of all expenses. This money is the source from which all those entitled to a share take their percentages.  The second factor is determined by the amount of money remaining with the production company after they have paid their investors and any other financial commitments – meaning the net profit, if any!