A loan-out corporation is a separate legal entity that a professional forms to provide their personal services to outside clients. Instead of contracting directly with a studio, team, or client, you become an employee of your own corporation, and the corporation contracts with the client. The setup can cut your employment tax bill, shelter more retirement savings, and put a liability shield between you and the people who hire you. It also creates payroll obligations, audit exposure, and yearly compliance work that a sole proprietor never has to think about.
How the Structure Actually Works
Three parties sit inside every loan-out arrangement: you, the corporation you own, and the client who wants your services. You are an employee of your corporation. Your corporation signs a service agreement with the client and “loans out” your services under that contract. The client pays the corporation. The corporation then pays you a salary, withholds taxes, and handles any benefits.
The client has no direct employment relationship with you. That distinction drives the tax treatment, the liability protection, and the paperwork all the way through. The corporation keeps its own books, files its own returns, and operates as its own business.
Most loan-outs elect S corporation treatment for federal tax purposes. An S corporation passes income, losses, deductions, and credits through to its shareholders, who report them on their personal returns, avoiding the double taxation that hits C corporations.1Internal Revenue Service. S Corporations The entity type (corporation or LLC) and the S election are separate decisions, so some owners form an LLC and then elect S treatment.
Who Uses One
The structure is standard in entertainment. Actors, directors, screenwriters, producers, and musicians channel their engagements through loan-out entities, and major unions including SAG-AFTRA allow it under their collective bargaining agreements.2SAG-AFTRA. Important Message – California AB 5 and Loan-Out Companies Professional athletes use them for playing contracts and endorsement deals.
Outside those fields, high-income consultants, freelance engineers, and software developers on project contracts use loan-outs too. The math tends to work when you consistently earn well into six figures from personal services and the tax savings outrun the administrative costs.
The Tax Benefits That Drive the Decision
Splitting Salary and Distributions
The headline reason to form a loan-out is the payroll tax split available to S corporations. As an employee, you pay Social Security tax (6.2%) and Medicare tax (1.45%) on your salary, and the corporation matches those amounts. Remaining corporate profit paid out as a shareholder distribution is not subject to those taxes. For a high earner, that split can save tens of thousands of dollars a year compared with receiving everything as self-employment income.
The catch is that the salary has to be reasonable. The IRS requires S corporation officer-shareholders to receive reasonable compensation for their services before taking any non-wage distributions.3Internal Revenue Service. S Corporation Compensation and Medical Insurance Issues Setting the salary too low to maximize distributions is the single most common audit trigger for loan-outs.
Retirement Contributions
A loan-out corporation can sponsor a Solo 401(k). For 2026, the employee deferral limit is $24,500. Owners aged 50 through 59 or 64 and older can add an $8,000 catch-up, and those aged 60 through 63 can contribute $11,250 instead.4Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500 The corporation can then make an employer profit-sharing contribution of up to 25% of the owner’s W-2 compensation on top of that.
Health Insurance Deduction
With S corporation status, a more-than-2% shareholder can deduct health insurance premiums as an adjustment to income on their personal return. The corporation must pay the premiums directly or reimburse the owner, and those premium amounts must be included in the owner’s W-2 wages. The deduction covers the owner, spouse, dependents, and children under 27.
The QBI Deduction Is Usually Limited
The Section 199A qualified business income deduction can trim up to 20% off eligible business income, but loan-out owners in entertainment, consulting, and similar personal-service fields are classified as specified service trades or businesses, which phase out at higher incomes. For 2026, single filers begin losing the deduction at $201,750 in taxable income and lose it entirely above $276,750; joint thresholds are double. Most loan-out owners with enough income to justify the structure end up above the phase-out.
How to Form One
Name, Registered Agent, Articles
Pick a business name that is distinguishable from existing entities on file with your Secretary of State. Designate a registered agent with a physical street address in the state; a P.O. box will not work. File articles of incorporation covering the corporate name, purpose, authorized shares, and registered agent information. Filing fees range from roughly $50 to several hundred dollars depending on the state and whether you pay for expedited processing.
EIN and S Election
Get a federal Employer Identification Number using Form SS-4. Online applications through the IRS website typically issue the EIN immediately.5Internal Revenue Service. Instructions for Form SS-4
To elect S corporation treatment, file IRS Form 2553 no later than two months and 15 days after the beginning of the tax year the election should take effect.6Internal Revenue Service. Instructions for Form 2553 Miss that window and you wait a year or request late-election relief. S corporation qualifications include being a domestic corporation with no more than 100 shareholders, only individual shareholders (with limited exceptions), and a single class of stock.7Office of the Law Revision Counsel. 26 US Code 1361 – S Corporation Defined A single-owner loan-out meets these easily.
Bank Account
Open a dedicated corporate bank account once the state certificate and EIN are in hand. Route every dollar of corporate income and expense through it and never mix in personal funds. Most banks want the filed articles, the EIN letter, and a board resolution authorizing the account. This separation is not cosmetic. It’s one of the first things a court looks at when deciding whether your corporation is a real entity or just you in a costume.
The Contracts That Make It Real
A loan-out that exists only on the state’s website is easy to unwind. Three contracts hold the structure together.
The employment agreement runs between you and your corporation. It sets your compensation, describes the services you’ll perform for the corporation, and establishes the corporation as your employer for tax and benefits purposes.
The lending agreement runs between your corporation and the client. It spells out the scope of services, the fee the client pays the corporation, the timeline, and termination rights. It should also make clear that the corporation carries all employer obligations, including payroll taxes and workers’ compensation.
The inducement letter is a side agreement the client will usually require. It’s your personal acknowledgment that you understand the corporation’s commitments and will perform the services yourself. It gives the client a direct route to hold you accountable, since the underlying contract is with the corporation rather than with you.
Reasonable Compensation and Payroll
Setting your salary is where loan-out owners make the costliest mistakes. The IRS expects S corporation shareholders who provide services to receive wages that reflect market rates for those services.3Internal Revenue Service. S Corporation Compensation and Medical Insurance Issues Large distributions paired with a suspiciously low salary invite audits.
If the IRS reclassifies distributions as wages, you owe back employment taxes on the reclassified amount (both the employee and employer shares), a 20% accuracy-related penalty, and interest. Courts weigh the nature of your work, hours devoted, training and experience, comparable market rates, the corporation’s dividend history, and whether you used a consistent method to set your salary. No safe-harbor percentage exists.
Once you pay yourself, the corporation must withhold federal income tax, Social Security, and Medicare, remit the employer’s matching share, and pay federal unemployment tax on the first $7,000 of wages. States add their own withholding and unemployment obligations. These duties start the first pay period and repeat every pay period after.
Where the IRS Can Look Through the Corporation
Section 269A
Section 269A of the Internal Revenue Code lets the IRS reallocate income directly to the owner when a personal service corporation performs substantially all of its services for a single client and the principal purpose of the corporation is avoiding or evading federal income tax.8Office of the Law Revision Counsel. 26 US Code 269A – Personal Service Corporations Formed or Availed of to Avoid or Evade Income Tax That description covers virtually every loan-out.
A narrow safe harbor exists: the IRS generally won’t invoke Section 269A if the owner’s federal tax liability is reduced by no more than the lesser of $2,500 or 10% of the tax that would have been owed if the owner had performed the services individually. Owners who work primarily for one client at a time, common in film and television, should document business reasons for the corporate structure beyond tax savings.
Section 482
Section 482 gives the IRS broad power to allocate income among entities under common control when the current allocation either facilitates tax evasion or fails to clearly reflect income.9Office of the Law Revision Counsel. 26 US Code 482 – Allocation of Income and Deductions Among Taxpayers Because you control both yourself and your corporation, this applies. The IRS uses it to test whether the corporation charges arm’s-length rates for your services and whether expenses assigned to the corporation actually belong there.
Accumulated Earnings Tax
A 20% penalty tax applies to C corporation earnings retained beyond the reasonable needs of the business.10Office of the Law Revision Counsel. 26 US Code 531 – Imposition of Accumulated Earnings Tax For corporations whose principal function is services in performing arts or consulting, the safe-harbor credit is only $150,000; other corporations get $250,000.11Office of the Law Revision Counsel. 26 US Code 535 – Accumulated Taxable Income S corporations generally avoid the accumulated earnings tax because income passes through to shareholders. It’s another reason the S election dominates.
Copyright: A Trap for Creative Work
Under federal copyright law, a work made for hire is a work prepared by an employee within the scope of their employment.12Office of the Law Revision Counsel. 17 US Code 101 – Definitions When you create copyrightable material as an employee of your loan-out, the corporation, not you personally, is the legal author. The employer owns all rights unless a written agreement says otherwise.13Office of the Law Revision Counsel. 17 US Code 201 – Ownership of Copyright
The consequence hits decades later. The Copyright Act lets authors terminate copyright transfers after 35 years, giving creators a chance to reclaim rights they granted early on. That termination right does not apply to works made for hire.14Office of the Law Revision Counsel. 17 US Code 203 – Termination of Transfers and Licenses Granted by the Author If your loan-out granted rights to a studio, you may not be able to terminate that grant later because the corporation, not you, signed. Courts have rejected attempts by individuals to disavow their corporate structure for termination purposes while keeping its tax benefits. Anyone creating copyrightable work through a loan-out should discuss ownership and termination with an intellectual property attorney before signing production contracts.
Keeping the Liability Shield Intact
The protection a loan-out gives you is only as strong as the formalities you keep. Courts can pierce the corporate veil and hold you personally liable if they find no real separation between you and the entity. The analysis usually turns on whether there’s such a unity of interest that separate identities don’t genuinely exist, and whether respecting the corporate form would produce an unfair result.
Factors that make courts skeptical:
- Commingling funds by using the corporate account for personal expenses or depositing corporate income into a personal account.
- Failing to keep meeting minutes, board resolutions, or basic corporate records.
- Undercapitalization. Research on veil-piercing cases shows courts disregard the corporate form roughly three out of four times when undercapitalization is present, compared with about one in ten when it isn’t.
- Operating as a shell with no independent activity, assets, or decisions.
The discipline is straightforward. Issue stock to yourself. Hold annual meetings and document them, even if you’re the only attendee. Record board resolutions for major decisions like opening bank accounts, setting compensation, or entering significant contracts. Keep corporate funds fully separate from personal ones. These steps feel performative for a one-person entity, but they’re exactly what a court will look for.
Yearly Maintenance
A loan-out is not set-and-forget. Ongoing obligations include:
- State annual or biennial reports with the Secretary of State, usually with a fee ranging from about $20 to several hundred dollars.
- Franchise or privilege taxes in some states, from nothing to $800 or more per year, regardless of income.
- Payroll filings: quarterly Form 941, annual Form 940, and W-2 issuance by January 31.
- Corporate tax returns. S corporations file Form 1120-S annually by March 15; missing that deadline triggers automatic penalties.
- Annual meeting minutes documenting at least one shareholder meeting and one director meeting, with attendees, decisions, and vote outcomes.
Missing annual reports or franchise tax payments can lead to administrative dissolution, meaning the state revokes the corporation’s good standing. A dissolved entity cannot enforce contracts or defend lawsuits until it’s reinstated, usually with back fees and penalties.
Foreign Qualification
If you incorporated in one state but regularly work in another, you may need to register as a foreign corporation there. Common triggers include maintaining an office, having employees working in the state, or regularly executing contracts there. Entertainment professionals who shoot on location in multiple states should look at each state’s threshold. Ignoring foreign qualification can block you from filing lawsuits in that state’s courts and may trigger penalties.